For Ecuador President Rafael Correa, how much a debtor should pay depends on whether he owes you or you owe him.
When Correa defaulted on $3.2 billion of the nation’s debt five years ago, he refused to give creditors more than 35 cents on the dollar to buy back the bonds. Now, he’s demanding 49 cents on the dollar to settle $2.43 billion of debt from borrowers who failed to keep up with payments after Ecuador seized 33 lenders during its late-1990s financial collapse.
While the central bank says the plan isn’t comparable with the government’s debt resolution, a settlement will erase one vestige of the crisis, which caused a default, a presidential coup, the currency’s collapse and the emigration of more than 2 million economic refugees. Correa, who has relied on oil profits, loans from China and the public pension system to help finance Ecuador since his 2008 default, is offering to forgive penalties and some interest in exchange for the cash.
“The government is looking for some liquidity, which it needs,” Mauricio Pozo, a former economy and finance minister, said in a telephone interview from Quito. “There’s a problem of policy consistency, but I doubt they’re connecting how much they paid bondholders and how much they want to collect.”
Correa is offering to forgive some interest and fees for almost 3,000 borrowers who owed money when the banks went under if the debtors repay the original amount plus 8.2 percent annual interest compounded over the life of the loan, according to the central bank. They would have three years to pay the debt before the government restarts lawsuits to force payment.
Ecuador, which has defaulted three times since 1981, is demanding full repayment with interest and fees for 2,600 more borrowers who officials suspect used personal ties to bank employees to gain access to credit.
Central bank President Diego Martinez, appointed by Correa in January, said the government needs the funds to help repay about $850 million to depositors of the failed banks who lost their savings when the lenders collapsed. The government’s plan to get 40 percent more from debtors than it paid to bondholders is fair because the bonds were issued illegally, Martinez said.
“It’s not 100 percent comparable,” Martinez said in an interview at his office in Quito. “They were legitimate debts.”
The government, which assumed responsibility for collecting the loan payments and refunding depositors after the banks closed, also made mistakes keeping track of how much borrowers owed, when they made payments and how the loans were calculated after the switch to the U.S. dollar as the country’s official currency, which compounded the problem for debtors over the following years, Martinez said.
“The people that managed the liquidation of these banks didn’t do their jobs well,” Martinez said. “They committed many injustices.”
In the default, Correa stopped payments on bonds due 2012 and 2030. The bonds, sold in 2000, were issued as part of an earlier debt restructuring following the 1999 default. Correa said the bonds were illegitimate, partly because of the high price the government paid when it renegotiated the notes.
Correa continued making payments on bonds due in 2015, which he considered legitimate. Those securities now yield 6.87 percent, or 6.51 percentage points more than similar-maturity Treasuries as of 12:29 p.m. Quito time, down from a gap of as high as 48 percentage points when Correa stopped payments on the other notes.
Thirty-three banks collapsed in the aftermath of Ecuador’s financial crisis, which began after a period of deregulation weakened oversight, according to data from the country’s banking superintendent. When the global price of oil, the country’s biggest export, plunged in 1997 and 1998, the government wasn’t able to repay its foreign debt, declaring a default in 1999.
Attempts to cut public expenses, reduce fuel subsidies and raise taxes led to an annual inflation rate that reached 91 percent by 2000.
Correa’s offer is too onerous and doesn’t give borrowers enough room to pay off their loans before the proposed deadline, said Cecilia Bossano, a member of a group representing some of the debtors. Her organization has asked the state to offer terms in line with the 2009 sovereign debt renegotiation.
“They should forgive the debt on the same terms because that’s how they did it,” Bossano, a 54-year-old freelance television producer, said in a telephone interview from Guayaquil.
Bossano, who says she’s appreciative of government efforts to resolve the loan issue, fell behind on her payments during the crisis as devaluations and the collapse of the country’s former currency, the sucre, undermined her family’s wages. She and her husband borrowed the equivalent of $95,000 in sucres in 1994 to build a house, then refinanced the loan in dollars four years later with a total balance of $115,000.
She said she has paid $80,000 on the loan in the past 19 years and owes $315,000 today.
The government may still improve its terms and offer more assistance to help repay the debts, such as new loans to set up businesses or the opportunity to refinance at state-controlled banks, said Pedro Solines, the nation’s banking superintendent. Terms need to be easy enough that borrowers are able to repay their debts or the problem won’t go away, he said.
“It’s the starting point, but everything could be revised,” Solines said in an interview at his office in Quito. “What we want first of all is to make things easier.”
The proposal may also benefit candidates from Correa’s Alianza Pais political party in provincial and municipal elections scheduled for next February as voters see the government fighting to recover money for the state, according to Sebastian Oleas, an economics professor at the Universidad San Francisco in Quito.
“At the end of the day, he’s demanding a payment for the state,” Oleas said. “The holders of the 2012 and 2030 bonds didn’t have many alternatives other than accepting -- it was that or nothing. The good-faith debtors don’t have many options either.”