by Alberto Acosta*
"War is the continuation of politics by other means"
"War is an act of violence whose objective is to force the adversary to do our bidding"
Karl Von Clauswitz (1780-1831), "The Art of War"
Amidst great fanfare, and ovations from both the press and various multilateral organisations, the Ecuadorian government presented the results of the re-negotiation of the commercial and bi-lateral external debt as a major triumph. The principal objective of the negotiations, expressly recognised by the regime, was "to put Ecuador on the road to the reopening of access to international markets (keeping payments on international obligations up to date ) (1), something much more urgent now that the dollarisation of the economy is under way.
At the same time, the re-negotiation was seen as a way to lighten the burden on the country’s fiscal accounts, at least in the short term, as well as to improve the sustainability indices of the debt, and concretely, to reduce the percentage of the debt as related to GDP, which, it is expected, will experience an average growth of less than 3% over the next five years.(2)
Another of the sub products of the renegotiations is a reduction in the "country risk" premium. This would encourage direct foreign investment and, in turn, the possibility of financing social spending by using the resources freed up due to both the lower cost of debt service and the debt swaps to be agreed to in the not too distant future. From this perspective the government is presenting financial management of the debt within the logic of "globalisation", and painting it over with concern for social issues in order to facilitate the job.
As we will see however, what was obtained is quite limited, if not negative, for the country. Once again, as Simon Bolivar pointed out when referring to the external debt which arose due "to the work of usurers and merchants", (we see how) "the lenders and the intermediaries, wise in the alchemist’s art, change any old pebble into a golden ornament"
The Rebirth of the External Debt
In many Latin American countries it was firmly believed until recently, that the problem of the external debt had been resolved. While the debt itself had not disappeared, it had at least been relegated to a lower plane. And as part of this optimistic spirit, the end of the economic crisis was also spoken of, given that between 1990 and 1994 the region had experienced a small expansion of its economies and a reduction of inflation in the midst of a significant inflow of capital.
In almost all the countries of the region the regularisation of debt service served to confirm this viewpoint. Beginning in 1992, the majority of countries in arrears had found some way of regularising their debt payments and thus reversing the process of accumulation of back payments. In particular, with the beginning of renegotiations within the Brady Plan, to which Ecuador was admitted between 1994 and 1995, this situation appeared to be consolidated
The resulting message was clear: the external debt problem can be resolved. Furthermore, there is a technical solution to the problem, in particular through the use of the mechanisms offered by the Brady Plan, and other complementary options. New possibilities for external financing were opened up through the emission of sovereign bonds, such as the Eurobonds issued by Ecuador in 1997. In light of the above, the orthodox adjustments aimed at achieving liberalisation and market access at all costs were seen as more viable.
However, in 1995, due to the Mexican crisis and its consequences, known as the Tequila effect, this initial enthusiasm suffered its first blow. In addition, the continuing high cost of debt service, the concentration of capital inflows in only a few countries, not to mention the extremely modest rates of growth in the majority of countries of the region, also seemed to indicate that it was imprudent to draw hasty conclusions about viability. On the other hand, once the fright of the Tequila effect had been overcome, the Latin American economy returned to "normal".
The return to tranquillity did not last very long. From mid 1997, fragments of news began to filter through about a distant, and difficult to understand, crisis. Within a short time the countries of South East Asia entered a state of financial melt down. The situation was converted into a major shock when Russia fell into an accelerated recessive spiral and the financial tremors began to shake apparently solid South American economies such as those of Brazil, Argentina, Peru, Colombia, and Chile. Ecuador, plagued by the fall in oil prices; the Asian Crisis itself; the El Niño phenomenon; political instability; and social resistance; as well as problems related to structural adjustment and moral problems related to the bailout of the banking system, entered one of the worst crisis in its entire history.
Given this context it should come as no surprise that the Ecuadorian debt crisis has become more acute. What was initially seen, in 1982, as a temporary problem related to lack of liquidity, became a more problematic situation demanding a diversified treatment, in which the accepted outcomes were always inspired by the needs of the creditors. The initial approach of the debtor countries, that of renegotiating the debt to obtain better terms of payment in exchange for acquired commitments, and thus to lighten the weight of their debt service, turned into a permanent mechanism. A series of apparently new financial instruments were also added (debt for social spending swaps for example). This approach, which almost always required the consent of the IMF, whether in the framework of the Paris Club (bilateral or official debt) or the negotiation committees, and now the Brady Bonds (commercial debt), has simultaneously served as a lever for the application of stabilisation and structural adjustment programmes.
As a response to this situation, the only effective (but insufficient) tactic used by the debtor countries has been the moratorium. Time and again, almost all the indebted countries, including Ecuador, have turned to temporary suspension of debt service payments, almost always due to incapacity to pay rather than as the result of an alternative strategy. For diverse reasons, including complicity, the various proposals for a joint solution from the debtor’s point of view, have gone no further than the proposal stage. In fact if we look at past experience, we can see that the relationship between the Latin American countries and the international financial markets is one of a series of moratoria. Moratoria have been seen as a problem to be immediately overcome, accepting conditions which would often make the very deal that was obtained non viable, as with the Brady Bonds in the Ecuadorian case.
So it was that between July and September 2000, after the Ecuadorian moratorium of the second half of 1999, with a new and even hasty conventional negotiation, Brady Bonds were exchanged for Euro and Global Bonds.
With the pocket of the creditors and not the Ecuadorian interest in mind
The rapid acceptance of the Ecuadorian proposal by the private creditors was a foregone conclusion. It was an operation which was assured beforehand; it had the approval of the IMF and the support of important consulting firms charged with protecting the interests of the creditors. The Ecuadorian national interest was not on the agenda, and apparently how much Ecuador could and should pay was not a matter for consideration.
In terms of the financial mechanism itself, the government exchanged Brady Bonds (3) and Eurobonds (4) for Global Bonds. With the exchange of prematurely aged bonds for new bonds, a reduction in the cost of debt service of about US$ 1,500 million was achieved over the next five years: an average of about $300 million per year (5). According to the External Debt Renegotiating Committee, the discount exceeded 40%. And all this in less than a month from the time the proposal was presented publicly, a record time, which would serve as another government success story.
Such a marvel, does not, however, stand up to serious scrutiny.
In the first place, the US Treasury Zero Coupon Bonds, to the amount of some US $750 million, which should have been paid in 2025, were taken off the hands of the creditors before they came due. So the holders of Ecuadorian debt bonds received advance payment of the capital owed as part of the collateralised Brady Bonds (par and discount).
With regard to the discount thus obtained, the figures are contradictory. According to official documents released in July and August 2000, $1,250 million of Global B Bonds (12 years) and "approximately" $2,700 million of Global A Bonds (30 years) (6) were to be issued, totaling US$ 3,950 of Global Bonds. Compared with the existing US$ 6,946 million of Brady and Euro Bonds (7) this represents a discount of 43%, a figure which could rise due to the programmed repurchase of the new bonds on the secondary market.
If we accept the official figures mentioned above and the logic of their calculation, as well as the fact that Ecuador has already surrendered the collateral in order to pay the capital we find that the discount is not 43% but barely 30%. But this is not all. According to figures found in Presidential Decree No 618, published in the Official Register No 147 of August 22, 2000, the government will in fact issue US$ 1,250 million of Global B Bonds and $4,500 million of Global A bonds. These are destined exclusively as exchange for Brady Bonds (par, discount, PDI and IE) and Euro Bonds. This gives us a new total for the Global Bonds of US$ 5,750 million, not the $3,950 million initially stated by the government. This variation, which according to government spokespeople is explainable by "the renegotiation mechanism", implies a discount of only 17%
Whatever the case, even if we accept that the discount is 40%, the figure obtained is minimal in terms of the national interest. The creditors themselves expected that Ecuador would request a 50% real reduction, on papers which were quoted at a discount of 70 to 75% or even less. So at the end of the day, the creditors, especially those who had speculated with the purchase of cheap Ecuadorian debt during the moratorium, made hay. In one case, the Mexican telephone company (Telmex), which during the moratorium period had acquired US$ 675 million worth of Brady Bonds (11% of the Ecuadorian commercial debt) at a discount of close to 70%, made a multi million dollar profit simply because the announcement of an agreement caused the price of debt bonds to rise (8).
But, once again, this is not all. What is perhaps more important is to estimate the cost of servicing the debt now that the capital corresponding to the Brady Bonds has been paid. If we calculate the nominal value of the cost of service, we find that compared to the cost of servicing the Brady Bonds, after a reduction in the short term (5 years) that of the Global Bonds begins to climb. In the end, the cost of servicing the Global Bonds will be U.S$ 3,000 million greater than that of the Brady Bonds, which signifies, in practice, new debt.
As we will see in the following, the new bonds, with six monthly due dates, also offer a series of advantages and incentives for the holders (both foreign and national):
In the case that Ecuador does not comply with its new financial obligations, the government has imposed sanctions on itself. So, if there is a delay in payments on the new bonds within the first three years, more bonds will be issued to a value of 1.3 times the original, a sanction of 30%. After the fourth year the sanction is reduced to 20% and after seven years to 10%
The repurchase of debt will be programmed: calling it "active debt management". Ecuador will repurchase the equivalent of 3% per year of the original value of its debt, at market rates, beginning in the 13th year after emission of the Global A bonds. In the case of the Global B bonds, the repurchase will be 10% after the sixth year. However, once the bond exchange has been concluded, which is almost immediate, the bonds can be repurchased, which will almost certainly be done with the money from privatisations; but these repurchased bonds will be compensated for in the future according to the framework of the "active debt management". Thus, discarding the possibility of creative intervention in the market, the high price of the Global Bonds will be maintained for the benefit of their holders
The interest on the Global A bonds will rise from 4% to 10%, at an annual rate of 1%. The interest on the Global B bonds is set at 12%, which explains the increasing pressure of the debt service.
The periods for the service of the new bonds are similar to the Brady Plan, which means that there is no grace period in order to ease the critical situation of the national economy.
One hundred and forty million dollars in arrears will be paid immediately.
Thus sweetened, the Global Bonds will keep their high price and will consequently lower the "country risk", a true reflection of the submissiveness and generosity of the Ecuadorian government.
Noise and empty vessels at the Paris Club.
As a complement to the renegotiation of the commercial debt, the renegotiating committee went straight to the Paris Club (9), where, according to the official, and officious, spokespeople, the results have also been formidable. However, once again, a more detailed analysis shows that what was achieved in Paris in September is neither new nor sufficient. In order to obtain an agreement based on the "Houston Terms", there was nothing more to be done than to wait in line.
For the seventh time since July 1983 (10), the above mentioned creditors cartel accepted a conventional reprogramming of Ecuador’s debts. The commercial credits will be paid within 18 years, at market rates, and with a grace period of three years. Those debts considered as support for development (ODA) will be paid in 20 years, with a 10-year grace period, and under concessionary terms (11). Eight hundred and eighty million dollars worth of arrears and payments pending have been consolidated until the 31st of April 2001.
There has been no reduction of the debt, nor of the present net cost of its service. What was offered was some debt swaps, to be negotiated bi-laterally, which provide the possibility of converting 100% of the official debt and 20% of the commercial debt. And according to official statements, when Ecuador enters a renegotiation with the IMF Extended Credit Facility in April 2001, it will also return to the table with the Paris Club (12), waiting on the results of the coming renegotiation of the Club with Russia and Nigeria.
The interest unpaid during the grace period will be capitalised. And so, when the payments begin, Ecuador will be faced with much higher quotas. Even worse, the country, which was not paying a substantial part of its bi-lateral debt, this year will pay 109 of the 459 million dollars requested by the Paris Club, while the rest will be capitalised. These are precisely the Houston Terms.
The debt for social spending swaps fall into the bi-lateral sphere. It is not a Paris Club issue, even though the Ecuadorian government arrived there with a swap proposal signed by two UN bodies, UNICEF and the UNDP, as well as the civil society organisation (13) which lead the development of the proposal, but which had not specifically authorised its use by the government. The renegotiating committee of the Gustavo Noboa government thereby hoped to project an image to the international creditors of being supported by important civil society actors (14)
It also needs to be mentioned that the possibility for social spending swaps was already open, but had not been used by the national authorities due to the internal difficulties in releasing the required resources. In the context of bi-lateral debt we should also remember that years previously, the Belgians had unconditionally cancelled the whole of their Ecuadorian debt, while the Swiss did it by establishing an equivalent fund for social investment and the Germans had wiped out parts of a debt that wasn’t being paid.
No matter how much official rhetoric inflates them, the amounts to be gained in this way will always be small and spread out over time; amounts which otherwise would have to be found internally. However, the small amount of resources destined for social spending will give the government the opportunity, with the help of a lot of populist rhetoric and patronage, to assure itself of the support of society’s most impoverished groups, and to try to weaken the resistance of broad based, organised sectors, while carrying privatisations and structural adjustment to the limit.
We should bear in mind that the whole of the renegotiation process had the support and advice of the IMF. The urgent need to move forward with the renegotiations was foreseen in the Letter of Intent signed in April 2000, and from which the basic receipt for the acceleration of the structural adjustment and privatisation agenda was derived. What is more, from the beginning it was expected that the country would not seek the terms of the Highly Indebted Poor Countries (HIPC) program (15). According to some official spokespeople it was not convenient to assume the position of "beggars", as this would have meant discouraging foreign investment... even though, according to other officials, demonstrating the poverty of the country helped to achieve the results mentioned.
So what’s all the shouting about? Just for the option to go further into debt? It would appear so. The value of the "successes" of the renegotiation, is that new external debt can be negotiated, debt which will soon be indispensable in financing the dollarisation process, which, far from being, as some claim, a powerful medicine for all that ails us, will not in fact eliminate fiscal or external imbalances. Indeed, it seems that with a rigid and irrevocable exchange rate such as the dollarisation, a type of addiction to external debt is produced. This can clearly be seen in the experience of those economies that have opted for dollarisation or convertability, such as Panama and Argentina.
So, if the cost of servicing the external debt rises in the foreseeable future, the country will once again be able to opt for the traditional form of postponing the problem through successive refinancing processes; opening up one hole in order to fill another, time and time again. But before that happens, it is proposed that the resources can be found to reduce the weight of the debt and its service cost by means of the privatisation process (via repurchase). Another urgent complementary measure in this financial operation is the handing over of the State oil company Petroecuador’s producing oil fields (by means of the so-called shared production contracts: an assault in every sense) in exchange for which in the short term the country will receive a juicy oil bonus, and the construction of the heavy oil pipeline (OCP in Spanish). The OCP will enable a greater amount of oil to be transported in order to meet acquired financial obligations, as was evidenced by some of the proposals for its construction. Debt service and the contracting of new debt, more oil production (there is already talk of a third pipeline), and privatisations, are an inseparable trilogy for the support of the official dollarised monetary scheme.
In this framework we need to understand the reach of the commercial debt renegotiation and the arrangements with the Paris Club. The balance of such highly trumpeted agreements is very poor in terms of national development, even though they may open the door to new credit. In fact they are just another link in the long chain of the "eternal debt". There is no evidence of creativity. The national economy’s real capacity to pay is not considered. There are no contingency clauses in the case of a fall in GDP, a reduction in the price of oil, or another Niño phenomenon. No thought was given to a grace period in order to allow the Ecuadorian economy, which experienced a brutal fall of 8% in GDP and 9.8% in per capita income last year, to recover. Other elements such as the legality of the debt, or the claim for the ecological debt, are also not incorporated. And as on numerous other occasions, ample benefits were provided to the creditors.
In short, the country lost a great opportunity to fashion a different response to those traditionally engineered. It wasted a historic moment for a definitive resolution to its debt. Ecuador could have been the driving force behind a process based on justice and transparency, and given the repeated failures of the traditional negotiations (six previous attempts between Ecuador and the Club of Paris) the country could have turned to international arbitration. In this situation, with a real national policy, the country could even have tackled the international credit organisations over the impacts of the huge debt.
An important point here is the political economy conditionalities which are imposed in all debt management processes. The ultimate interest of the creditors, without ceding their right to demand repayment, was, and continues to be, to promote a submissive reinsertion of the indebted economies into the world market. With the dollarisation, Ecuador has taken on the sad role of guinea pig to Washington’s geopolitical interests. As Ecuador has learned since the 1980s, these conditionalities are made manifest in a greater internationalisation of the capital market, a virtually indiscriminate opening of commercial markets, an exaggerated financial liberalisation, and a "re-primerisation" of its economy. This is the setting in which the dollarisation and the renegotiation of the debt operate, and exert pressure for the completion of the modernisation of the State, preferably by means of privatisations.
The debt is not only a problem of quantity but also one of quality. It is a truly political and ideological challenge which demands ethical responses and not simply isolated measures born of pragmatic complicity. Paraphrasing Von Clauswitz it has once again been shown that the debt, due to both the externally and internally precipitated impacts in the society of the debtor country, is the continuation of politics by other means. And its management is linked to another axiom of Von Clauswitz , that for our purposes can be read as saying that the debt is an act of violence whose objective is to force the debtor country to do the bidding of the creditors. We well know that the total repayment of the debt is not that important compared with the fact that countries such as Ecuador should submissively accept the conditions of the new international division of labour known as "globalisation". And what is even more perverse, that this action -- thanks to debt swaps and to the demagoguery fed by possible social investment -- will even be a motive for thanking the creditors.
* Alberto Acosta is an economist. He teaches at universities in Ecuador and is the author of a number of books including "The Eternal Debt"
Notes:
1. There are seventy million dollars still to be renegotiated. The money is in the hands of the Deposit Guarantee Agency which assumed the debts of a series of banks now controlled by the State.
2. The expected growth is: 3.55 in 2001, 2.5% in 2002 and 2003, and 3% in 2004 and 2005. Certainly low expectations.
3. The issuing of these bonds, which were exchanged for previous commercial debt, which had also been suspended since 1987, dates from 1995. That is, of a programmed life of 30 years, the bonds lasted less than 5 years.
4. These bonds, known as sovereign bonds, were placed on the financial market in two operations during 1997.
5. In the year 2000 the reduction will be U.S.$ 300 million, 110 million in 2001, 505 million in 2002, 300 million in 2004, and 300 million in 2005.
6. For each 100 Global A Bonds, the creditors can opt for 65 Global B.
7. PDI 2,877 million, PAR 1,739, IE 155, Discount 1,597, Euro02 405, and Euro03 173.
8. As a reference, the price of the PAR Bonds (for the Discount Bonds, the values are in parenthesis) which at their lowest point had reached 30.00 (32.90) and which had an average price of 33.10 (35.23) in the three months previous, rose to 35.41 (37.50) on the 24th of July and to 38.44 (46.69) on the 28th of July. The Eurobonds rose in the same period from 36.00 to 50.00
9. The Ecuadorian creditors are Germany, EE.UU, Spain, Israel, France, U.K., Italy, Japan, and Norway.
10. The first settlement was achieved on the 28th of July 1983, the second on the 24th April 1985, these two agreements are no longer valid. The third agreement was reached on the 20th of January 1988, the fourth on the 24th October 1989, the fifth on the 20th of January 1992, the sixth on the 27th of June 1994, and the seventh on the 15th of September 2000.
11. The official debt is U.S.$1,339 million, the commercial $936 million, and the capital and interest due 193.5 million.
12. Days later in Prague, the Ecuadorian negotiator, Jorge Gallardo, had to admit that what was obtained at the "Club" was "profoundly conventional" (El Expresso27/9/2000).
13. The Jubilee 2000 Guayaquil Network
14. The manoeuvre was laid bare in Paris itself, as, while the Renegotiating Commission was meeting with the Creditors, a delegate of the Confederation of Indigenous Nationalities of Ecuador (CONAIE), and many other popular Civil Society organisations, arrived in order to deliver a proposal to the peoples and governments of the Paris Club. The proposal demanded the immediate and total cancellation of the debt, and the application of a series of positive conditionalities for the use of the liberated resources. Also included in this proposal was a request for international arbitration, such as that suggested by the organisations linked to the Jubilee 2000 campaign, especially in Europe.
15. The debt indicators would have allowed Ecuador to qualify for the HIPC without a problem, even its GDP per capita approaching the established limits. What is still lacking is compliance with all the demands of neoliberal adjustment, above all in the fields of privatisation and fiscal reform.