Is the Obama administration condoning Ecuador’s default?

By Felix Salmon
May 18, 2009

One of the great things about working for Reuters is that if an important story appears on the wire, I can agitate to have it put online as well. So go and read this, by Alexandra Valecia and Alonso Soto: the astonishing yet seemingly all-but-missed news that Ecuador’s audacious and dangerous decision to bite its thumb at the entire international financial community has seemingly been ratified by not only its Andean neighbors, the owners of the Andean Development Corporation, but also by the international community more generally, in the shape of the Inter-American Development Bank.

The Andean Development Corporation’s representative in Quito, Luis Palau-Rivas, said the lender sees the OPEC-member nation’s defaulted debt restructuring “positively.”

“We see the process positively because it’s a voluntary process,” Palau-Rivas told reporters. “It’s helping to solve a difficult situation … and will benefit everyone.”

Palau-Rivas said the CAF was planning to disburse up to $700 million in loans to Ecuador in 2009. From those credits about $450 million will go to the public sector.

The IADB also said it was seeing progress in Ecuador’s talks with bondholders.

“The good results obtained (in the restructuring) will benefit all Ecuadoreans during difficult times,” the lender’s representative, Carlos Melo, said in a statement. “The IADB reiterates its predisposition to work alongside Ecuadoreans to promote economic development.”

This is absolutely astonishing stuff. Historically, private lenders have looked to the multilaterals having what’s known as a “lending-into-arrears” policy, whereby countries which needlessly and gratuitously default on their debts get cut off from international funding.

In this case, Ecuador had more than enough money to pay all of its debts, but defaulted for nakedly political reasons, and is now in the process of buying back its defaulted debt for little more than 30 cents on the dollar.

The idea that this is “a voluntary process”, as Palau-Rivas says, is utterly ridiculous: the bondholders have had no say whatsoever in what has happened, and their only choice is whether to accept Ecuador’s risible offer or to hold onto defaulted Ecuadorean paper indefinitely.

And it’s far from clear that even if the restructuring does generate “good results”, the consequences “will benefit all Ecuadoreans”. Indeed, it’s quite likely that the opposite will be the case — that Ecuadoreans, cut off from private-sector funding and investment, will find themselves shunned for the foreseeable future.

But never mind Ecuador — what message does this send to the rest of Latin America, not to mention Africa and the rest of the world? The multilaterals seem to be saying that they will embrace any default, no matter how egregious, and that the best strategy for any indebted nation is to simply force its lenders to write off the vast majority of their loans. This is likely to backfire massively not only on the multilaterals themselves — which of course have billions of dollars in debts outstanding to the likes of Ecuador — but also on the countries in question, most of whom who want to be taken seriously but all of whom must now be considered highly suspect credits, given the incentives being put in their way by CAF and the IDB.

I can’t imagine that these statements from CAF and the IDB were made without the foreknowledge, if not the outright approval, of the Obama administration, and that worries me a lot. Somebody should ask Lael Brainard, the nominee to be undersecretary for international affairs, what she thinks of all this. For that matter, somebody should ask Larry Summers and Tim Geithner, both of whom held that job in the past, what they think. In the midst of a major domestic financial crisis, I fear some nasty precedents are being set internationally with nobody noticing.


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This isn’t a nasty precedent, Felix – this is paving a way for the US to default on our debt. Ecuador is not a negative scenario – we should applaud the bravery of their indifference!

Posted by Unsympathetic | Report as abusive

Well, that CAF and IADB are somehow endorsing the deal is no surprise to me – not that they were willing to critizise a member country.

I can understand the CAF and the IADB not willing to be used as scapegoats for the average Ecuadorean politician – in any event, how fast can Correa switch from the “evil investor” to the “evil multilateral”?

Chavez already reneged publicly of CAF loans for purely political purposes – nevermind that CAF has been financing Chavez’s infrastructure plans…

Posted by Lgg | Report as abusive

That Presidential handshake with Hugo Chavez should not be forgotten. It certainly won’t be by Chrysler or GM bondholders. Defaulting on US debt may not be far behind.
Some continue to view President Obama by the company he kept in the past and the company he keeps now. Birds of a feather flock together.

Posted by John | Report as abusive

You act like money is this blessed and holy thing. Money is nothing more than a means of exchange. Ecuador is in the process of building true wealth, it is developing infrastructure, it is developing a middle class, it has a good health care system, and the nation is moving in the right direction. I applaud their brave decision to stand up to vicious international finance. International bankers form a mafia like cartel that seeks to dominate all men, all nations. The “global economy” or international financial monetary system is a fraud, nothing more than a global casino that enriches a few and enslaves the rest. The usurious interest rates the IMF and World Bank charge developing nations is a crime against humanity. I only hope the rest of the 3rd world will follow Ecuador’s example and force Obama to embrace a saner pro-development model that only allows credit creation for infrastructure projects instead of financial tools.

Posted by nate powell | Report as abusive

When Correa was elected president, he became the CEO of Ecuador and he accepted resposibility for the assets and liabilites of the country. When viewed politically, both sides of the argument have merit. However, finacially and fiscally, to default on promisory notes shows a lack of integrity in the part of Correa and the Ecuadorean government. Ecuador went into those bond agreements with full knowledge of the cost, i.e. interest charged, for those loans. Correa’s so called “restructuring” of that debt is a sham, particularly in light of the fact that Ecuador had and has the money to make those payments.

Posted by George Doktorczyk | Report as abusive

Felix is raising important points here.

But we should not forget the more traditional American role – participating in genuine defaults by impoverished nations, but operating as enforcer in chief for vulture funds that buy defaulted foreign debt for pennies on the dollar and then use the leverage of US foreign aid to force the poor countries to pay the vultures in full.

There has to be a balance somewhere….

Posted by DollarEd | Report as abusive

Salmon is just mad because he got it all wrong. He predicted chaos and ruin for Correa and Ecuador and instead, its increasingly clear that Correa played everyone like a piano. The Ecuadorean people will be the beneficiaries. As a fellow Fighting Illini alum, I am quite proud of someone who can beat the sharks at their own game. What Ecuador did was perfectly legal, using the market’s own vulnerabilities against it. Salmon is probably right to be pissed, from the perspective of capitalism. But from any perspective that considers the poor and desperate people of the South, Correa’s actions are nothing short of heroic.

Felix, I will bet you one pint of good English beer that your prediction that Ecuador will “cut off from private sector financing [...] for the forseeable future” turns out to be a crock.

This theory of yours that sovereign defaults in the past have a material effect on investor perceptions of the likelihood of sovereign defaults in the future, has a certain amount of theoretical attractiveness, but it’s been falsified empirically again and again. This alleged cost of default in terms of future access is illusory. It doesn’t exist.

Posted by dsquared | Report as abusive

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