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Ecuador Declares Foreign Debt Illegitimate

In November 2008, Ecuador became the first country to undertake an examination of the legitimacy and structure of its foreign debt. An independent debt audit commissioned by the government of Ecuador documented hundreds of allegations of irregularity, illegality, and illegitimacy in contracts of debt to predatory international lenders. The loans, according to the report, violated Ecuador’s domestic laws, US Securities and Exchange Commission regulations, and general principles of international law. Ecuador’s use of legitimacy as a legal argument for defaulting set a major precedent; indeed, the formation of a debt auditing commission sets a precedent.In the 1970s Ecuador fell victim to unscrupulous international lending, which encouraged borrowing at low interest rates. But in over thirty years the country’s debt rose from $1.174 billion in 1970, to over $14.250 billion in 2006, a twelve fold increase, due in large part to interest rates that rose at the discretion of US banks and Federal Reserve from six percent in 1979 to twenty-one percent in 1981. The commission revealed that Salomon Smith Barney, now part of Citigroup Inc., issued unauthorized restructuring of Ecuador’s debt in 2000 that lead to exorbitant interest rates, which, combined with illegal borrowing by former dictators, has turned the country, along with many of its Southern neighbors, into a major capitol exporter to its Northern “benefactors.” Over the years, the country has made debt payments that far exceed the principal it borrowed.Of all loans made between 1989 and 2006, fourteen percent was used for social development projects. The remaining 86 percent was used to pay for previously accumulated debt. Continuously from 1982 and 2006, the country paid foreign debt creditors $119.826 billion for capital and interest, while receiving over the same period $106.268 billion in new loans, which amounts to a total negative transfer of $13.558 billion. The human costs are staggering. Every dollar spent on illegitimate international credit means less is available for fighting poverty. In 2007 the Ecuadorian government paid $1.75 billion in debt service alone, more than it spent on health care, social services, the environment, and housing and urban development combined. CLIP

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