Ecuador Defaults on Its Loans - What Does It Mean for South America?

Back in October, I began wondering if relations between Ecuador and Brazil were not starting to head south. Dissatisfied with the work that Odebrecht, one of the largest construction firms in Brazil, had performed on dams in Ecuador, Correa expelled the company and siezed control of the dams in question. This was a particularly inflammatory action because Lula's government, ever trusting on the power of negotiations, had made strong efforts to work out a settlement between Odebrecht and Ecuador, and Ecuador, which gave hints that it may be willing to settle, rather quickly reversed course. In response, Brazil suspended a trade mission to Ecuador, and the sale of 24 Super Tucano jets (from Brazil) was frozen. Relations on both sides were harmed, as Brazil and Ecuador both had financial and infrastructural benefits they could have co-benefited from before things got tense.

Well, if things were tense before, they will get ugly now, as Ecuador has defaulted on its loans. As Boz pointed out, when Ecuador was trying to get support in the region for its default, Brazil was less than welcome to working with Ecuador on the issue, in part because of Correa's somewhat abrasive attitude towards Brazil back in September and October. The default only worsens things, as Odebrecht was not the only matter at issue back in October; Brazil's development bank (the BNDES) had invested $243 million in aid to help Ecuador, and the expulsion of Odebrecht and the default put that money at risk for Brazil. Brazil has already announced that it will no longer lend money to Ecuador, given its history of defaulting (in addition to this year, Ecuador also defaulted on loans in 1999, as well as in the 1980s.

Nor is Brazil the only one at risk here. By defaulting, Venezuela, one of Correa's creditors, is now going to probably have to swallow at least $400 million in bonds, at a time when the economy in Venezuela is already threatened by the low price of oil right now.

Right now, it's still pretty difficult to really come down on one side or another in this issue. I certainly don't think Ecuador "defaults out of spite." The default on loans is something Correa has been threatening since he ran for president in 2006. What is more, he's not some economic idiot or an uninformed ideologue - he has a PhD in international economics. That said, I think his move has a very real chance of seriously harming Ecuador's relations with its neighbors. Defaulting on IMF and World Bank loans that impose neoliberal economics is one thing; defaulting to friendly nations like Brazil and Venezuela, who can relate to the experience of onerous debts and who are providing a far more friendly, regional alternative to the IMF and World Bank is a very different matter. And Ecuador certainly isn't defaulting due to a lack of funds - it apparently has $5.65 billion in cash reserves right now, so this isn't a case of "we simply can't afford it." It definitely seems, as Ishmael put it, that "this is an ideological dispute more than a strictly economic one (in as much as you can separate the two)." And I'm not totally unsympathetic to Correa's desire to wipe the slate clean from debts established by previous administrations, and try to lead economic reform from within.

At the same time, Brazil and Venezuela certainly aren't "predatory creditors." Those two countries have been at the forefront in helping South America as a whole become a stronger economic bloc, breaking some of its economic dependence on trade deals and loans with the U.S. and Europe and strengthening the region's own economic power in the global economy (as well as helping to improve infrastructure and social programs). However, as two growing regional and, in the case of Brazil, global economic powers, they are experiencing one of the downsides that comes with a global economic presence: not all investments pay off in the end. This may not be the first time Brazil has had a debtor default in loans to Brazil, but I certainly can't think of a previous instance, and certainly not one with this magnitude both economically and geopolitically.

I think overall, everybody is losing in this. Correa's choice may be right for his country financially, but his general abrasiveness is really alienating and is putting Ecuador more and more in a corner by itself. What is more, Ecuador simply does not have all of the capabilities to establish major infrastructural development and independence on its own right now, and relies on its neighbors for basic construction and military needs (as the Odebrecht case and its fallout demonstrated), so the temporary economic benefits it may gain from defaulting are still mixed. And Brazil and Venezuela certainly are losing out: after trying to help a neighbor with a similar political ideology (i.e., more "left" than "right"), they are left swallowing hundreds of millions of dollars in loans, just as the global economy gets weaker. They really have no incentive to help out Ecuador in the future, and I wouldn't blame them for refusing to do so. I wouldn't say that Ecuador's regional relations are irreparably damaged, but given this default and (in the case of Brazil) previous contentions with its neighbors, Ecuador is looking pretty isolated right now.