8. 2008, Ecuador buys back its own debt after audit

In 2007, Ecuador’s president Rafael Correa commissioned an audit of the country’s debt from a group of experts. Following its conclusions, Correa declared most of the country’s debt illegitimate because it had been contracted against the interest of the population. However, instead of a formal repudiation, Correa chose to buy back about 70% of the outstanding debt, leveraging the income of oil extraction. By doing so, Correa made sure Ecuador would still be able to borrow on international markets.

One consequence of the debt crisis of the 80’s was the pink tide (marea rosa), the advent of leftwing populism in South America. Building upon the discontent of the populations with austerity measures imposed by the IMF (International Monetary Fund), leftwing leaders were able to coalesce indigenous movements, labour unions and student protesters to win a string of elections from the late nineties until now. Correa won the presidential elections in Ecuador in 2006, Chavez won in Venezuela in 1998, Lula da Silva in Brazil in 2003, and Kirschner in Argentina the same year. In more recent years, the pink tide continued with the victories of Gustavo Petro in Colombia in 2022, Claudia Sheinbaum Pardo in Mexico in 2024 and the re-election of Lula in 2023. 

At the very start of his presidency, Correa revoked the representatives of the World Bank and asked those of the IMF to leave the building of Ecuador’s central bank. He then implemented an ambitious plan of investments in healthcare, education and other public services, with the idea to redistribute the revenue of oil extraction to the majority of the population. With this strategy based on his background as an economist, Correa was successful in raising living conditions, reducing poverty and reducing social inequality. However, the reliance on oil drilling was the cause of conflicts with indigenous communities. 

Correa was elected in 2006 with the promise to reduce debt payments, which covered 38% of the government’s revenue. In 2007, a commission was formed to audit Ecuador’s external debt and evaluate which parts could be considered illegitimate. This commission was constituted of experts from Ecuador such as Ricardo Patiño and Maria Elsa Viteri, who both served as ministers of finance, and a dozen of people including experts from indigenous and environmental organisations in Ecuador, including Ricardo Ulcuango (CONAIE) and researchers from international NGOs such as Gail Hurley (Eurodad, UK), and Eric Toussaint (CADTM, Belgium).   

Despite support from voters and enthusiasm from the coalition that lifted Correa to the presidency, as soon as it started to work, the audit commission was criticised in the ecuadorian conservative press for being partial and having its conclusion set up in advance. According to Hugo Arias Palacios, who presided the commission, employees of the finance ministry were reluctant to share official documents with the commision. Eventually, a debt audit report was produced. Initially printed in Spanish and distributed in Ecuador, later on CADTM published an English translation online.   

Although the report of the audit commission didn’t receive a lot of attention outside of Ecuador, the decision to suspend debt payment didn’t go unnoticed. The move was criticized in the US for the risk it posed to isolate the country and undermine its ability to borrow in the future. Then came a surprise. Instead of a simple default or a formal repudiation, Ecuador bought back the bonds that Correa had announced to default. This had to be done in secret, or the price of the bonds would have gone up and the purpose of saving the money on future interest payments would have been defeated. The purchase of illegitimate bonds was done at 35% of their face value, saving about $7 billion for the country after accounting for future interest payments. Conservative commentators described the debt buy back as market manipulation. Progressive opinions described it as a pragmatic move.  

The history of internal and external criticism towards Ecuador’s debt “cancellation” illustrates the importance of who shapes the narrative when it comes to debt. In Ecuador, the most audible opposition to Correa’s handling of debt was coming from private newspapers and TV channels owned by Ecuadorian historical landowners, members of the aristocracy who defended a conservative worldview and considered Correa’s socialist program as dangerous. In the US and European financial press, no one seems to have actually read the audit when it was published. But the reaction to Correa’s default and bond buyback indicated that the question of the debt’s legitimacy was irrelevant to the interest of investors. Truthfully, whether the debt was contracted in the interest of the population was not important to private creditors. What mattered to them was the precedent set by a country which refused to oblige on the ground of what creditors called “willingness to pay”.     

During Correa’s presidency, Ecuador built several hydroelectric plants, with the aim to use the income from oil extraction to transition out of fossil fuels. As of today, Ecuador is one of the few countries with a fully renewable power grid. This outstanding result didn’t come without costs. As a consequence of the debt buy back of 2009, the country was unable to access international markets, so it borrowed from China to finance the construction of hydropower plants, using the future revenue of oil extraction as collateral. This meant that before being able to phase out oil, Ecuador would have to pay its debt to China. Construction works grew year after year with unforeseen costs spiraling up, and Ecuador continued to borrow from China at high interest rates, with oil revenues as guarantees. Because China, unlike the IMF, didn’t give any conditionality on the loans, Correa was still able to make large public spendings in education, infrastructure and healthcare. But the dependence of the country to oil exports was a risk.  

When oil prices suddenly dropped in 2014, the country was caught in a new debt trap. Because the largest source of income for the government of Ecuador is from oil sales, the price of oil on international markets has a direct impact on its capacity to pay its debt. In 2014, the price of oil went down for two main reasons: a slowdown of the Chinese economy, and the USA started to use a new technique for oil extraction, fracking. This ecologically disastrous method caused an increase of the quantity of oil produced globally, thus making it cheaper. Unable to pay the large debt owed to China, Correa faced the choice of cutting the budget for infrastructure, education and drought prevention. In this peril, Correa decided to borrow again from the world’s markets and the World Bank in 2014. In 2016, Correa had to take a new loan from the IMF to cover the costs of a devastating earthquake. 

When Correa left the presidency in 2017, the country was more indebted than in his first year, in 2006. Furthermore, the reliance on hydropower has made the country vulnerable to blackouts caused by droughts, which are becoming more frequent because of climate change. Not everything is perfect, but it shouldn’t shadow the fact that Ecuador is now energy independent, using mostly renewable power for electricity. The example of Ecuador also serves as a reminder of the true cost of the green transition for developing countries burdened by debt, and the especially high cost for indigenous communities whose land is now exploited for mineral extraction the same way as it has been exploited for oil. Although Ecuador’s debt to China is a substantial burden, it would probably never have been able to make the same investments in hydropower under the rule of the IMF’s structural adjustment plans, because of the austerity measures dictated by the IMF as conditions for its loans.     

After three consecutive presidential terms, Correa left the power in 2017. Facing an economic downturn, his successor reversed the country’s attitude to the IMF and borrowed again, accepting the IMF austerity conditions. The progress made under Correa in education, public services and renewable energy have since stagnated.  

During his time, Correa was able to improve education and living standards in the country, but this didn’t translate into significant change in income equality, or lead to the technical innovation in renewable energy that were hoped for after such large investments in education. In practice, the old aristocracy of the private sector is still in command of agriculture and trade, showing little will to collaborate with universities to transition out of an economy based on the export of fossil fuels and agricultural products like bananas. A sharp divide remains between the appetite of the private sector for cheap labor and the ideals of public education.     

In 2021, the Covid pandemic hit Ecuador severely. Austerity measures that were conditions to IMF debt restructuring had weakened healthcare services, while oil prices nose-dived after the general lockdown, putting the public budget in jeopardy. Ecuador had to go into technical default. Salaries of public servants weren’t paid anymore, basic services were inaccessible, poverty and inequality became prevalent.  

During the Covid pandemic, Ecuador was among the dozens of Global South countries faced with a debt crisis and little source of revenue, while private creditors were cashing in interest rates and holding out of negotiations with the IMF. According to the research of Daniel Munevar for Eurodad, the largest private creditor of Ecuador in 2021 was BlackRock, the largest financial company in the world and the largest investor in fossil fuels. 

When the US Federal Reserve raised interest rates in 2022 to compensate for the quantitative easing measures that kept the US economy afloat during the covid lockdown, Ecuador, with dozens of countries in the Global South, was faced with unpayable debt. Just like in the 1980's  when the US Federal Reserve raised interest rates to compensate for a rise in the price of oil (see previous article), interest rates on the Global South rose and the relative value of the dollar went up. Once more, the cost of financial shock in the North was shifted to the South.  

Rafael Correa currently resides in Belgium, in voluntary exile from his country, where he was charged for corruption. Correa claims his innocence and Belgium declined to extradite, describing the charges as “political persecution”.

Notwithstanding a legacy patched by the reliance on oil extraction and the bitter conflict that it caused with indigenous communities, Correa’s attempt at exiting the debt trap of IMF loans is a historical landmark. The creation of a debt audit commission and its report will serve as an example for other nations willing to follow the same path and claim the legitimacy of democratically elected government over the financial interest of private businesses in New York or London. Moreover, the strategy of buying back Ecuador’s own discounted bonds on the secondary debt market is a unique precedent, representing a middle-ground between compliance with the rules of international markets and formal repudiation of the outstanding debt. By doing so, Correa removed a heavy debt burden, while preventing a conflictual escalation with creditors and a protracted exclusion from international markets. 

Jana helped with fact-checking and corrections.

This article is the eighth of a series dedicated to a timeline of debt cancellations in history.