Ecuador's 2008-09 Debt Restructuring: A Special Case?

Abstract

In late 2008, Ecuador launched a successful effort to restructure its external debt, the circumstances of which are unique in the recent history of sovereign debt restructurings. The country had a rocky history of debt repayment, but after restructurings in 1995 and 2000, it had arguably sustainable levels of external debt. In 2006, Rafael Correa, running for president, promised to refuse to pay the country’s debt if elected. After he was elected, Correa formed a public debt audit commission to evaluate debt incurred by the country over the previous three decades. The commission found that some of the country’s bonds were illegitimate for various reasons, including unfair gains to private interests, oppressive terms in the bond contracts, and the fact that the country’s debt burden was crowding out provision of basic public goods and services. In late 2008, the country defaulted on two of its bond issues. After the default, and amid global financial turmoil, as the price of those bonds dropped, the country began a program of purchasing them through financial intermediaries. It then conducted a formal bond repurchase at 35 cents on the dollar, with an eventual participation rate of over 90%. This episode represents a rare instance of a sovereign restructuring external debt in the absence of acute financial stress and an equally rare instance of a sovereign having obtained debt relief based, at least in part, on the express assertion of the illegitimacy of its obligations. This Chapter concludes that because of various factors, including the unique global financial context and the country’s particular history of debt repayment, it is not clear whether one can draw any general lessons -- regarding debt buybacks or the viability of claims about legitimacy of debt, for example – from the 2008-09 episode.

Keywords: sovereign debt, sovereign debt restructuruing, ecuador, illegitimate debt, odious debt, debt buyback, Brady Bonds