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Ecuador at the cross-roads, for an integral audit of public indebtedness
Chapter 5: Renegotiating the debt
by Virginie de Romanet , Benoît Bouchat , Stéphanie Jacquemont
16 August 2007

Chapter 5: Renegotiating the debt

A. Moratoria: wasted opportunities
B. Exchanges and rescheduling

  • 1. The Brady Plan
  • 2. Global Bonds
  • 3. Restructuring the bilateral debt with the Paris Club

C. Debt cancellations

  • 1. The HIPC initiative and Ecuador
  • 2. The decision of the Norwegian government in October 2006: an unprecedented acknowledgement by a creditor State of its responsibility in bad lendings

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Since the 1982 debt crisis, there have been various attempts to resolve the problem. There have been repeated rescheduling and debt exchanges in Ecuador, as in other countries, but a lasting solution has never been found. With good reason, since the purpose of the renegotiations has never been to find a definitive solution to free the country from the burden of debt. Their aim is merely to temporarily reduce debt servicing to enable maximum repayment. Successive leaders before Rafael Correa all complied with the creditors’ conditions, and the national interest was never an issue in the negotiations.


On two occasions over the period 1970-2007, Ecuador declared a moratorium on the payment of its external debt, particularly to banks. Yet each time the suspension of payments was considered by the IFI more as the regrettable effect of passing difficulties than the logical consequence of an unsustainable system. They were never seen as part of a confrontation with creditors or retaliatory measures that could help get the upper hand in the negotiations.
It was in 1987 that Ecuador suspended its payments for the first time. The default was due to different factors: the drastic rise in international interest rates since the early 1980s and the restriction of access to financial markets; the fall in oil revenues with the fall in the price of the barrel; a significant increase in debt servicing due to “sucretisation” (see chapter 2), incurring further debts to pay for the increase; the devaluation of the sucre against the US dollar which automatically increased the burden of repayments in dollars. The earthquake in March 1987 and the burst pipeline preventing oil exports made the balance of payments even more precarious. In this difficult context, the interest on the commercial debt was not paid for nearly five years. However, as was mentioned in Chapter 4, in 1992 the State renounced in extremis the opportunity to claim the lapse of its external commercial debt, as it was entitled to do by law. For according to the laws of New York and London regulating these debts, when an unpaid debt has not been claimed for five years, the obligation to pay it falls. But the State waived this right and signed a convention guaranteeing payments, before the debts were confirmed by their exchange for Brady bonds in 1994.
In 1999, a crisis of unprecedented gravity shook the country under the combined effects of several factors: the Asian crisis and the rise in interest rates for emerging countries; a fall in exports due to the El Niño [1] phenomenon, a climate of defiance and the withdrawal of foreign capital, etc. Nor did the moratorium decreed in August 1999, at the height of the crisis, result in a favourable renegotiation for Ecuador, but in a further exchange of debts - Global bonds replaced Brady bonds and Eurobonds – which proved even more damaging for the country, as we shall see. This second moratorium could have been used to impel a favourable renegotiation, since as a result of the default of payment, the Brady bonds had fallen to about 25% of their nominal value. If the State had really wanted to get the debt reduced, it could have done it then, while at the same time getting round the prohibition on buying bonds included in the Brady Plan.
As Alberto Acosta [2] notes, this moratorium was of no use to Ecuador since it was not part of an active strategy of debt reduction. It did not lead to a stand-off between debtors and creditors; on the contrary, discussions between the two parties never stopped. The 1994 scenario was thus repeated: the national interest was not taken into account in the exchange of bonds, the question of how much Ecuador could afford to pay was not examined, and neither was that of the illegitimate debts that Ecuador need not pay. Once again, the negotiations came at a high cost to the State and to the detriment of the people of Ecuador.
The present government, however, seems to have adopted quite different tactics. President Correa has said: « We certainly cannot exclude the idea of a unilateral moratorium, based on the needs of the country, and of course, aggressive renegotiation of the debt. [3] »


The external commercial debt has been rescheduled several times, since the start of the debt crisis. There have been three sessions of negotiations with the executive committees of the creditor banks: the first from August 1982 until September 1985, the second from September 1985 to August 1987 (the Baker initiative) and the third from September 1987. These sessions have not been able to resolve the crisis and in 1987, Ecuador suspended repayments of its commercial debt. This was then transformed into Brady bonds, then Global bonds. The following analysis will centre on these two exchanges which, like the rest of the renegotiations, provided a solution for the lenders and not for the debtor country.


The agreement for the Brady Plan was signed in 1994 and it was set up in 1995. The idea was to exchange an old outstanding debt for a new one in the form of bonds. In 1992, the public commercial debt came to 6 964 million USD, of which 2 009 million were interest in arrears [4]. The Plan provided for four types of bonds: « Discount » and « Par » bonds, for the capital, and « PDI » and « IE » bonds, for the interest. The first two were guaranteed by 0 per cent U.S. Treasury bonds, bought using a new loan. The Brady Plan was presented at the time as an instrument to reduce the debt and its service. Discount bonds did actually make it possible to get a reduction of 45% on the capital of the old debt, but their interest rate was variable and higher than market rates (LIBOR [5] + 13/16). As for Par bonds, they gave no reduction of capital but had increasing fixed interest rates (starting at 3%, then gradually rising to 5% by the eleventh year). The other two types of bonds quite simply capitalised the interest (In 1994 the interest in arrears represented 41% of the debt contracted with international banks). The effect of the Plan was a temporary relief for the State thanks to the reduction of capital and periods of grace (30 years for Par and Discount bonds, and 10 years for PDI bonds). Nevertheless, in the long term, the debt service was going to increase, all the more since the State had to take out further loans from the IMF, the IDB and the WB to finance the operation. As can be seen in the following chart, the service on Brady bonds was to increase substantially (by 294%) between 1995 and 2008. But Brady bonds were soon replaced by Global bonds, after a new suspension of interest payments in 1999.

Predicted service on Brady bonds (in millions of US dollars)

Year PAR Discount PDI IE TOTAL
1995 43.0 52.6 35.8 23.3 154.7
1996 61.0 93.7 74.0 21.5 250.2
1997 65.8 98.1 79.7 20.9 264.5
1998 67.0 101.8 85.9 20.2 274.9
1999 74.1 101.8 95.8 29.0 300.7
2000 76.5 101.8 106.6 27.7 312.7
2001 86.7 102.1 161.5 26.4 376.8
2002 86.1 101.8 214.8 37.7 440.4
2003 89.1 101.8 214.8 35.5 441.2
2004 90.9 101.8 215.4 33.4 441.5
2005 64.5 102.1 358.2 0 524.8
2006 95.6 101.8 347.5 0 545.0
2007 95.6 101.8 336.8 0 534.2
2008 95.6 101.8 412.6 0 610.0
2009 95.6 102.1 394.9 0 592.6
2010 95.6 101.8 377.7 0 575.2

Source : Alberto Serrano, « El Brady Plan ¿Solución para prestmistas o prestatarios ? » , Ecuador Debate, n°45, December 1998


In 2000, shortly after the economy was « dollarised », there was renewed renegotiation of the external commercial debt, then standing at 6 945.9 million USD, almost all of which was in Brady bonds and Eurobonds. The idea was to exchange the Brady bonds and Eurobonds for Global bonds A and B (see Chapter 2) in response to the new exigencies brought about by dollarisation. Officially, the objectives were to relieve pressure on the State cashflow; to establish a debt service profile in harmony with the State’s financial capacities; to reduce pressure on the budget and free up resources for priority programmes; to significantly reduce the nominal amount of the debt; but also, to proceed with a maximum of advance repayments; to guarantee Ecuador’s return to the financial markets and finally to get the country’s risk premium [6] reduced. According to Alberto Acosta, the government’s strategy should be seen as coming within the framework of structural adjustment, barely disguised by a thin layer of social preoccupations.

The government claimed that exchanging Brady bonds for Global bonds constituted a 43% debt reduction. That is what the figures imply. Global A bonds were emitted to a value of 1 250 million USD, and Global B bonds, 2 700 million USD, i.e. 3 950 million USD for an initial debt of 6 945.9 million USD. However, to the 3 950 million Global bonds should be added the 722 million USD paid to holders of Brady bonds in the form of U.S. Treasury bonds (see below), and the reduction then comes to less than 30%. Furthermore, these figures should be treated with caution. Indeed, Alberto Acosta [7] mentions the presidential decree n°168 whereby the State undertook to issue 5 750 million dollars’ worth of Global bonds, destined exclusively to be given in exchange for Brady bonds. Thus the government’s declarations, which presented the operation as one of exceptional debt reduction, were completely misleading, especially considering that at the date of exchange, the Ecuadorian bonds had dropped to 25% of their nominal value. It was thus an initial debt of 6 298 million USD (the amount of the bonds actually exchanged), by then only worth 1 575 million, that was exchanged for at least 3 950 million USD. The conditions of this exchange were so advantageous for the creditors, and therefore so detrimental to Ecuador, that A. Acosta writes of « an incredible hold-up » [8]...

There follows a list of some of the exceptional advantages conceded to creditors:

  • They received 722 million dollars’ worth of 0 per cent U.S. Treasury bonds as collateral for the Brady bonds before the due date (2025).
  • Interest accrued, i.e. about 161 million USD, was paid immediately, so that the creditors received 883 million USD cash. This money could have been used to buy up the Brady bonds whose value had dropped sharply during the moratorium. On the contrary, those who had bought their Brady bonds at almost 20% of their nominal value during the moratorium and the negotiations, got a very good deal.
  • The government imposed sanctions upon itself in case of late payment (a penalty of 30% if the delay occurred in the first three years, 20% as of the fourth year, and 10% after the seventh year).
  • The State is under obligation to buy back bonds on the secondary market to maintain high rates, for the benefit of the creditors.
  • The interest rates are higher than market rates: for 30 year Global bonds, they go from 4% to 10% (increasing by one percentage point per annum) and for 12 year Global bonds, they are at 12%. These excessive interest rates explain the increase in the service of the bonds in the years following the agreement. According to the calculations of Marco Flores, cited by Alberto Acosta [9], the service of the Global bonds is 1.4 billion USD more than what had been anticipated for the Brady bonds.
  • The agreement does not include any contingency clauses. Indeed, the IMF was later to impose a reverse contingency clause: Lucio Gutierrez (president from 2003 to 2005) undertook in 2003 to make the necessary adjustments in case of a fall in the price of oil to guarantee the service of the debt.

Such are the advantages conceded that one may well question whether both parties were actually present during the negotiations. It does indeed seem that the Ecuadorian State, in line with the interests of the local political and economic elite, accepted the creditors’ conditions without a murmur. As Wilma Salgado [10] points out, the local financial sector is linked to foreign creditors, through the possession of a considerable amount of external debt paper. This would explain why no-one defended the interests of the debtor State, i.e. the interests of the Ecuadorian people. They are always the losers, and despite the media hype, there have never been any miraculous negotiations, except perhaps for the creditors. The same applies to negotiations with the Paris Club, as we shall see.


Ecuador has signed 8 agreements with the Paris Club since 1983. These have in no way reduced the bilateral debt stock, which has gone from 73.3 million USD in 1983 to 1 338 million USD in 2003, as shown in the following chart:

Amounts restructured with the Paris Club (in millions of US dollars) [11]

Agreements Date of report Capital Interest Total End of year balance in report
Agreement I 28/07/83 87.5 26.6 114.1 73.3
Agreement II 24/04/85 319.9 ---- 319.9 345.5
Agreement III 20/01/88 307.0 146.0 453.0 835.1
Agreement IV 24/10/89 246.2 132.3 378.5 953.4
Agreement V 20/01/92 205.1 135.5 340.6 1179.4
Agreement VI 27/06/94 232.3 120.4 352.7 1302.9
Agreement VII 15/08/00 521.6 349.3 861.9 1318.7
Agreement VIII 13/06/03 79.1 ---- 79.1 1338.5

The first four agreements with the Paris Club followed what is called classic procedure, meaning that commercial debts and concessionary debts (at lower rates and linked to Official Development Assistance or ODA) were rescheduled at rates in line with market rates. From 1992, Houston terms, intended for low-income countries, were applied. According to this scheme, commercial debt is rescheduled over a period of 15 years (with up to 8 years of grace) and the concessionary debt over a period of 20 years (with up to 10 years of grace). It is important to remember that Ecuador’s negotiations with the Paris Club have never resulted in even partial cancellation of debts. The last two agreements allowed for part of the debt to be converted, on a voluntary and bilateral basis, to a productive investment of a social or environmental nature. These are known as « swaps », or debt exchanges, another mechanism used for restructuring debts, whether bilateral or commercial. Ecuador made use of this mechanism for the first time in 1987. Between then and 1998, Ecuador thus exchanged 0.4% of its total debt at an average cost of 66%, while the market price was 30%, showing yet again that the creditors are the ones who benefit from this type of exchange.

In July 2006, Ecuador’s debt to the Paris Club came to 980 million USD, of which 139 million USD were concessionary loans (11%) and 841 million USD of commercial loans. There follows a breakdown of the bilateral debt by country in July 2006 (In millions of US dollars) [12].

Country Original
Paris Club Total Percentage
Korea 8.4 0.0 8.2 0.4
Colombia 5.6 0.0 5.6 0.3
China 8.4 0.0 8.4 0.4
Denmark 16.0 0.0 16.0 0.7
Belgium 16.4 0.0 16.4 0.7
Argentina 20.9 0.0 20.9 0.9
Canada 1.0 25.1 26.1 1.2
Norway 0.0 35.3 35.3 1.6
Germany 16.8 40.8 57.6 2.6
United Kingdom 0.0 102.7 102.7 4.7
USA 57.0 61.8 118.8 5.4
France 85.9 99.8 185.7 8.4
Israel 0.0 183.6 183.6 8.3
Brazil 316.8 0.0 316.8 14.4
Italy 66.5 292.9 359.4 16.3
Japan 220.3 118.1 338.4 15.4
Spain 381.9 20.1 402.0 18.3
Total bilateral debt 1221.7 980.2 2201.9
Total publ. external debt 10 371.2
% bilateral debt /total debt 21.2%



The initiative in favour of heavily indebted poor countries (HIPC) was started in 1996, then revised in 1999 (HIPC II) since too few countries met the initial criteria of the initiative. It makes debt reduction possible (aiming just to make it « sustainable » …) for very poor and very heavily indebted countries that satisfy the conditions imposed by the IMF and the World Bank, that is, the same old structural adjustment reforms in line with the same old logic that has been hammered home for over 20 years. The procedure for acceptance is nevertheless very long and the conditions many and stringent. This is why the initiative has got considerably behind schedule. It should have ended in 2000 for the forty or so countries concerned, but the final date has had to be postponed several times. To date, only 31 countries have reached the end of the first stage which was to have lasted three years, and 22 countries have completed the initiative which was not to have taken longer than six years in all. Worse still, several countries which have applied the IMF / WB recommendations to the letter still carry a debt burden judged unsustainable, as the IMF’s predictions for the years ahead turned out to be wrong. The multiple inadequacies of the HIPC initiative have meant that the whole disastrous project has had to be entirely reviewed. This was supposedly the aim of the decisions taken in 2005 at the G8 summit at Gleneagles, but they too protect the interests of the creditors.

To be entitled to help under the HIPC initiative, a country must fulfil certain conditions. Firstly, it has to qualify for the Poverty Reduction and Growth Facility (PRGF). The PRGF enables countries with a gross per capita income of less than 895 USD, i.e. the poorest countries of the planet, to get low-cost loans. Secondly, the country must be faced with an unbearable debt burden, falling outside the realm of traditionally available debt-reduction mechanisms. To be considered as unbearable, the debt must be at least one and a half times the annual export revenue. Thirdly, the country must prove that it has undertaken reforms and is conducting economic policies in line with the IMF and WB’s structural adjustments. Fourthly, it must have drawn up a Poverty Reduction Strategy Paper (PRSP) enumerating the austerity measures, privatisations and other measures of deregulation that the country intends to take.

Ecuador does not meet the conditions of the HIPC initiative for two reasons: its GDP per inhabitant is too high (2 628 USD) and the ratio between its public debt and its exports is not unbalanced enough (about 120 %).

The coefficients of the debt with regard to the GDP, export revenues and fiscal expenditure clearly show that the Ecuadorian debt takes up far too much of the national budget and is unsustainable by the criteria of the Bretton Woods institutions. In fact, to assess the HIPC, the IMF and the World Bank have established certain minimum coefficients of debt sustainability. This depends on the capacity to pay the debt service, which is mainly related to export revenues and fiscal revenue. A poor country with a debt-service to exports coefficient of over 15% is considered to deserve a reduction of part of its debt. Even though the coefficients of the Ecuadorian debt far exceed the values established by the IMF and the WB, Ecuador was excluded from the HIPC II initiative.

Yet these coefficients reveal a far more serious situation than Germany’s in the 1950s, which enabled Germany to obtain the renegotiation of its debt on 27 February 1953. The lenders at that time agreed that Germany should not spend more than 5% of its export revenues to pay back its debt, while the ratio of debt service to exports was 3.9 (see table below). [13]. For Ecuador, this coefficient is over 30% of its exports.

Indicators of the external debt for HIPC countries, Ecuador and Germany.

Coefficient year 2005 HIPC threshold II Total public debt of Ecuador External debt Germany 1953
Debt service /exports 15 % 42% 96% 3.9%
Debt/exports 150% 144% 171%
Debt/GDP 50% 40% 48% 21.21%
Debt/ fiscal revenue 280% 255% 303%
Debt service / fiscal spending 22% 37% 24% 4.49%

Source: Jubilee Germany and European Central Bank

In a dollarised economy like Ecuador’s, the service of the internal and external debts depends directly on exports of goods and services and fiscal revenue. Consequently, the total amount of sovereign debt needs to be taken into account, i.e. the internal debt and the external debt.


At the end of the 1970s, Norway’s naval construction industry was in a bad way. The shipyards could not get enough clients and a great many jobs were under threat. As a remedy, the government decided to set up a « Ship Export Campaign ». The idea was to provide loans with worthwhile conditions to carry out the development projects of countries that wished to buy Norwegian ships. The Ship Export Campaign project was voted by Parliament on 19 November 1976.

Between 1976 and 1980, many loans were granted somewhat carelessly, irrespective of the feasibility of the projects or whether the borrowers would actually be able to repay the loan. Of 36 projects agreed in 21 countries, only three had been completed by 1987 and only two countries had managed to repay their debts [14].

Ecuador was one of the countries which did not manage to repay its debt. The State enterprise, Flota Bananera Ecuadoriana (FBE) bought four ships from Norway between 1978 and 1981 for the sum of 56.9 million USD. In 1985, the FBE went bankrupt and another State enterprise, Transnave, recovered the ships. Thus the debt was divided in two. 17.5 million USD became the responsibility of Transnave and the Ecuadorian State, and 13.6 million USD was renegotiated in the Paris Club. The first part was completely repaid but the second increased significantly during the ensuing years. By March 2001, it came to 49.6 million USD, whereas the total amount paid by the FBE, Transnave and the government had already reached 51.9 million USD.

Under pressure from debt-cancellation activists both in Norway and Ecuador, the Norwegian Parliament and government eventually realised that such actions were unacceptable. On 2 October 2006, Erik Solheim, the Minister for International Development, finally acknowledged his country’s share of responsibility for the failure of the development aid projects set up during the Ship Export campaign. He subsequently announced the cancellation of debts arising from the campaign for countries that still owed money, such as Ecuador, which still owed 36 million USD relating to ships bought.

Norway is a country that sets an example to the rest of the international community with regard to development assistance and debt. It has already implemented a certain number of intiatives aimed at reducing the debt burden of poor countries [15]. With the declaration of 2 October 2006, not only does it go some way to doing justice to countries which have been badly treated but even more importantly, it has launched a debate at an international level on the responsibility of creditors towards borrowers. For this cancellation is completely unilateral and does not result from negotiations with other creditors within the Paris Club, which shows that it is possible for a creditor who so desires to break away from the esprit de corps of its fellow nations. Furthermore, Norway declared it would not count this cancellation as part of its Official Development Assistance, unlike so many other countries. It shows itself favourable to a bilateral vision of development assistance, whereby both the country that provides the aid and the one that benefits from it have rights and obligations. Norway has expressed its wish for an institution to be established on an international level that would examine debts that could be considered illegitimate on the basis of the lenders’ responsibility.

Nevertheless, the pressures brought to bear on Norway were enormous. It was careful to announce that its decision in no way implicated the Paris Club and that it would not take such initiatives unilaterally in the future. This clearly shows that only with a strong grass-roots movement can this route be pursued. Indeed, the Norwegian government’s unprecedented decision was taken after a far-reaching campaign over several years on the part of SLUG, the Norwegian movement for debt cancellation, and the Centre for Economic and Social Rights (CDES) in Ecuador.

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This collective work was carried out in July 2007 at the request of AFRODAD ( by a team at the CADTM composed of Benoît Bouchat, Virginie de Romanet, Stéphanie Jacquemont, Cécile Lamarque and Eric Toussaint.

It was revised by Myriam Bourgy, Damien Millet and Renaud Vivien.

The English translation was done by Elizabeth Anne, Vicki Briault, Judith Harris and Christine Pagnoulle.

Footnotes :

[1El Niño is a sporadic phenomenon of climatic disturbance characterised by an abnormal rise in the temperatures of the Pacific Ocean. In 1997-98, it occurred on an unprecedented scale causing heavy rain in Ecuador which did enormous damage, with severe and lasting effects on the country’s production capacity.

[2Alberto Acosta, « Al servicio de la deuda, en contra del país », 11/02/2005,

[4Hugo Arias Palacios, Impacto económico, social y ambiental de la deuda soberana del Ecuador y estrategias desendeudamiento, p.23. CEIDEX, Third volume

[5LIBOR (London InterBank Offered Rate) is a reference rate on the finance market for inter-bank loans. It is the rate at whichthe major London banks lend to other banks.

[6Alberto Acosta, op. cit.

[7Alberto Acosta, “El canje de los bonos Brady por bonos Globales Ecuador: detalles de un atraco maravilloso”,


[9Alberto Acosta, « Al servicio de la deuda, en contra del país », 11/02/2005

[10Wilma Salgado, Acerca de la crisis financiera en el Ecuador, p.6, CEIDEX, Quinto volumen

[11Chart taken from Hugo Arias Palacios “Impacto económico social y ambiental de la deuda de Ecuador y estrategias de desendeudamiento”, CEIDEX, 3rd volume, p.45.

[12Idem p.42

[13See Eric Toussaint, The World Bank: a Never-ending Coup d’Etat. The hidden agenda of the Washington Consensus, Vikas Adhyayan Kendra (vAK), Mumbai, 2007, chapter 4

[14Figures cited by Kjetil G. Abildsnes in « Why Norway took Creditor Responsibility – the case of the Ship Export campaign ».

[15See the Norwegian government’s web-site:

Virginie de Romanet

est membre du CADTM Belgique

Benoît Bouchat
Stéphanie Jacquemont