As Crisis Mounts, Ecuador Declares Foreign Debt Illegitimate and Illegal

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By Daniel Denvir. Posted November 26, 2008.

A special debt audit commission released a report charging that much of Ecuador's foreign debt was illegitimate or illegal.

Amidst the spreading global financial crisis, a special debt audit commission released a report charging that much of Ecuador's foreign debt was illegitimate or illegal. The commission recommended that Ecuador default on $3.9 billion in foreign commercial debts--Global Bonds 2012, 2015 and 2030--the result of debts restructured in 2000 after the country's 1999 default.

Although Ecuador currently has the capacity to pay, dropping oil prices and squeezed credit markets are putting President Rafael Correa's plans to boost spending on education and health care in jeopardy. Correa has pledged to prioritize the "social debt" over debt to foreign creditors.

The commission accused Salomon Smith Barney, now part of Citigroup Inc., of handling the 2000 restructuring without Ecuador's authorization, leading to the application of 10 and 12 percent interest rates. The commission evaluated all commercial, multilateral, government-to-government and domestic debt from 1976-2006.

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Significantly, the commission singled out foreign debt for being "illegitimate" rather than simply illegal. Social movements have long declared most foreign debt to be illegitimate, but Ecuador's use of legitimacy as a legal argument for defaulting would set a major precedent; indeed, the mere formation of a debt auditing commission does so. Osvaldo Leon, of the Latin American Information Agency (ALAI), says that it remains to be seen if other countries in Latin America will follow suit.

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Former Constituent Assembly President Alberto Acosta echoed Correa, saying that the proposal could provide the legal basis for the prosecution of Ecuadorian officials involved in the negotiation of illegal or illegitimate debt. He also said that it was perfectly reasonable to take a debt's legitimacy into account. "The United States itself has embraced the concept of illegitimate debt in encouraging countries to forgive the debt accrued in Iraq under Saddam Hussein." In fact, the U.S. originated the concept of foreign debt after the Spanish-American war. The U.S. refused to pay Cuba's outstanding debt to Spain, arguing that it was created by agents of Spain in Spain's self-interest, a matter in which Cubans had no say.