President Rafael Correa has declared his country in default on foreign debt as his government grapples with falling oil income and a decline in remittances from Ecuadoreans living abroad. Calling the debt “immoral and illegitimate,” Mr. Correa said his government would not make a $31 million interest payment, a move heightening concern in global markets over Ecuador’s $10 billion in foreign debt. The decision by Mr. Correa, an American-educated economist, could have far-reaching impact in Ecuador, which risks being shut off from foreign credit markets even as the move temporarily frees up funds for social welfare projects.
-Ecuador: President Orders Debt Default
Correa did his Economics PhD at University of Illinois at Urbana-Champaign
Ecuador defaults on sovereign bonds;
Ecuador’s refusal to meet the $30.6m payment on the country’s Global 2012 bond, despite the fact that it has $5.65bn in cash reserves, sent dollar-denominated debt prices down sharply.
”I gave the order not to pay the interest and to go into default,” Mr Correa said. ”We know very well who we are up against - real monsters.”...
Alberto Bernal, Head of emerging market macroeconomic Strategy at Bulltick Capital Markets, said the move was a prelude to a decision to exit dollarisation.
”Dollarisation is popular in Ecuador. Yet president Correa does not believe in dollarisation, and he needs further tools to pump the economy, because he will never receive the support of the private sector to generate employment,” Mr Bernal said. ”We think that a 60 per cent to 70 per cent devaluation is likely to take place at some point in the near future, unless oil prices recover fast.”
Ecuador abandoned the sucre for the dollar in 2000 after the collapse of its banking sector, which effectively leaves Mr Correa with no monetary policy of his own...
Mr Correa, a US –trained economist and a close ally of Hugo Chávez, Venezuela’s president, has pledged an ambitious programme of social spending or on the implementation of a new constitution.
”The big problem with dollarisation is that if you don’t take it seriously, and you keep a loose fiscal policy as we have seen in the past few years, you have to provide an alternative for an overappreciated and uncompetitive economy,” a former Ecuadorean minister told the FT. ”If we didn’t have the commodities boom we could have very easily seen a collapse of the real sector and the financial sector in Ecuador much earlier.”