DEBT DEFAULT: Ecuadorian President Rafael Correa announcing the debt default on Friday. (Photo: Ecuador President's Office)
Ecuador is now facing an even worse economic outlook thanks to Rafael Correa's debt default.
BY CHRONICLE EDITORS
The biggest losers from Ecuador's debt default announced Friday are not foreign bond holders. Rather they are Ecuadorian companies, which now will have a virtually impossible time getting international credit - just as all markets are suffering from a credit crunch.
"Ecuadorian exporters of shrimp, banana and flowers will likely find it difficult to secure trade finance," UK-based risk consultancy Exclusive Analysis points out in a commentary today. "Heavy manufacturers, agricultural firms and service providers are also likely to see the cost of credit increase substantially, thus significantly raising non-payment risks."
ATPDEA UNCERTAINTY
Those problems come on top of Ecuadorian exporter's challenge of selling to the U.S. market as a result of uncertainty surrounding the country's benefits from the Andean Trade Promotion and Drug Eradication Act. The ATPDEA gives Ecuador duty-free access to the United States for 5,000 products. However, its ATPDEA benefits run out in December next year and may be cut earlier as the U.S. Congress reviews its status as a result of a recent wave of actions against U.S. investors. The latest debt default doesn't exactly boost Ecuador's chances of keeping the ATPDEA.
As a result of the debt default, Credit Suisse has revised down its growth forecast for Ecuador's economy next year from 2.0 percent to minus 1.0 percent.
Meanwhile, Exclusive Analysis predicts that most foreign direct investment is likely to stall or move to neighboring countries, where credit is cheaper and government interference less obtuse. Ecuador already has Latin America's second-lowest foreign direct investment compared with its GDP, as Latin Business Chronicle has pointed out.
"The most immediate impact of the default, however, will be Ecuador's exclusion from international credit lines at a time of the global credit crunch and falling oil prices," it says.
OUT OF TOUCH
The announced default shows just how out of touch President Rafael Correa is from reality. "The costs from declaring a default for the overall economy clearly exceed the savings benefits for the Ecuadorian government," IHS Global Insight rightly points out in an analysis today. "The country will suffer, among other effects, a reduction in credit lines for foreign trade and further capital outflows, an increase in borrowing costs, and ever-limited access to the financial system."
The move to default on a $30.6 million interest payment due today, will lead investors to lose more than they did when Argentina defaulted on its debt in 2001, according to Bloomberg. Correa made the decision to default not out of economic necessity -- Ecuador has ample foreign reserves - but ideological reasons.
The tragedy is that Correa's populist-socialist policies are hurting not only badly-needed foreign investors, but also Ecuador's own private sector. While Correa is looking for foreign scapegoats for Ecuador's growing economic problems, he'll find the true culprit by looking in the mirror.
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From: kito, nyc please educate yourself on the atpdea. ecuador's preferred trade status under the atpdea is not threatened. our government has made it clear it will be renewed. the atpdea is based on ecuador's cooperation on fighting drugs, (which they have been doing well), not on whether u.s. firms feel theyve been treated unfairly. correa is defaulting based on irregularities in issuing the bonds, not because he is "out of touch". ecuador will have an opportunity to defend itself in a u.s court and expose what these irregularities are.
From: sim, Quito From an American living in Ecuador - all of the press about Correa's position has been negative, but remember that Ecuador has been giving in to international economic pressure for the last few decades and it has resulted only in poverty and economic crises. Now at least they are trying something different. It may not be the best choice, but then again neither was all the neo-liberal restructuring of the past.
From: RL, Shangai Kito if you believe that Ecuador debt default and attacks on US investors won’t have any impact n the renewal of the trade preferences you are deluding yourself…. ... Sim if you think that the “international pressure” was the cause for past economic crisis and poverty in Ecuador you should go back to college.
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