The Eternal Debt

By Luis Fierro Carrión (*)

Ecuador was born in debt. When the Republic of Ecuador became independent, an agreement was reached whereby the nascent State would assume 21.5% of the debt of the "Gran Colombia", equivalent to £ 1,424,579.

The distribution of this debt was made at a meeting called in Bogotá, which was not attended by the Ecuadorian delegate. The division was made based on population but did not consider where the assets acquired with that debt were (mainly weapons). "Except for the old frigate Colombia, which happened to be in Ecuadorian waters, and 16 thousand pesos, Ecuador did not receive any other material good as a balance of the purchases made with the loans obtained for the struggles for independence (Alberto Acosta Espinosa, “The Eternal Debt”, 1990, p. 64).

The Republic began to walk with the difficulties of a child who carried "a sack of lead on his back," as Agustín Moreno said (quoted by Acosta).

Beginning in 1830, there were moratoriums on the payment of the external debt, renegotiations, proposed arrangements, etc. Ecuador ties with Spain, Venezuela and Argentina as the countries that have had the most defaults in history (a dozen in each case).

Acosta's book tells the story of the Ecuadorian foreign debt until 1990, with its sequence of defaults, negotiations, proposals. On some occasions it offered to pay the debt with "empty lands" in the Amazon or Esmeraldas (in fact there were Native Americans living there), with the Galapagos Islands, with shares in customs revenues, mine rents and other taxes. The effort to deliver "empty lands" in the Amazon even led to military conflicts with Peru, which claimed sovereignty over those territories. Thus, for example, in 1859 the Treaty of Mapasingue was signed, under occupation, which annulled the delivery of territories to bondholders.

As early as 1855, there was speculation with the purchase of the bonds in the secondary market: they could be bought at 4 percent of the nominal value, and, after some payment arrangements were announced, the price would rise to 16%. After the Liberal Revolution, the bonds of the "English debt" were exchanged for new bonds to finance the construction of the railway from Guayaquil to Quito. As the "repurchase" of the independence bonds progressed, their price increased, reaching 45%.

The "English debt" of independence would only be canceled in 1976, in the midst of the oil boom. The oil boom of the 1970s was the first opportunity to eliminate the country's external debt. For example, Norway, which developed the oil fields of the North Sea, not only did not get into debt, but rather accumulated a sovereign investment fund starting in 1990 that by 2020 had reached a value of 1,186,000 million dollars in assets (more than a trillion dollars).

But Ecuador, whose external debt had been reduced to just $ 241 million in 1970 (15% of GDP), began to borrow aggressively, partly to finance infrastructure works such as hydroelectric dams, and partly for military spending, reaching $ 10,283 million. in 1987 (109% of GDP).

The second opportunity to eliminate the debt occurred during the Correa government, in the years 2007-2016, when oil prices rose, generating $ 95,581 million in revenue for the treasury. In fact, in 2007, the (small) balance of the debt with the IMF was canceled.

But, instead of canceling foreign debt and accumulating savings and investment funds; the Correa government carried out a moratorium, not due to inability to pay, but to manipulate the market (so much so that more funds were used to buy back the discounted bonds than would have been the entire debt service expected that year). 

As oil prices fell from 2014, instead of reducing bulky public spending (44% of GDP in 2014), the Correa government began to issue debt aggressively. Thus, public external debt went from $ 8 billion in 2009 (13.2% of GDP) to $ 32 billion in 2017 (32% of GDP) and $ 40 billion in April 2020 (37% of GDP). Of this total, $ 18,7 billion corresponds to the bonds.

In the face of the COVID-19 pandemic, and the collapse of exports and tax revenues, the government asked bondholders to suspend payments until August, with a view to restructuring. It is clear that the Ecuadorian State will not be able to continue servicing the debt in the terms initially foreseen. A grace period is expected to be approved (no principal or interest payments, perhaps until December); a reduction of interest; an extension of the terms (could be extended between 5 and 7 years); and possibly a reduction in the principal amount (a 15 % reduction of the principal).

The Barclays investment bank, in an analysis of the issue, indicated that a 46% reduction in the net present value of the bonds could be obtained, combining a capital reduction, a grace period, lower interest rates (which it estimates could rise from 0% in 2020 to 6% after 2023), and longer terms. The International Monetary Fund itself has indicated that developing countries will require debt relief because of the severe economic recession caused by the pandemic.

But even if an adequate restructuring occurs, the external debt is likely to continue to affect the life and economy of the country for generations to come (unless steps are taken to create a savings and investment fund in a future oil or mining boom).

(*) This is an extended version of an opinion column published in Spanish in Diario El Universo of Ecuador, on July 3, 2020.

https://www.eluniverso.com/opinion/2020/07/03/nota/7892709/deuda-eterna