Newsmakers : Debt Default Threat Rattles Investors



Rafael Correa: Setting

off on the wrong foot

with investors

As Ecuadors new political leaders take the countrys helm, the focus of many people outside the country will be on the new president, Rafael Correa, who sailed to victory in late November 2006 with a near-60% majority. Part of Correas appeal to voters was that he promised to boost spending on social programs, including subsidies. However, investors are particularly anxious because the new presidentthe eighth in 10 yearshas threatened to default on the countrys $11 billion debt.

While some observers believe the threats may end up being a way to simply renegotiate the debt terms, Correas talk of a debt default led the spread on Ecuadorian credit default swaps (CDS) to jump, making it the worlds most expensiveeven more so than those of war-torn Iraq. Part of the reason is that Ecuador has shown in the past that it is not afraid of defaulting, having done so in 1999. A possible default comes despite Ecuador having no problems servicing its debt; it is seen as a purely political-ideological move.

But while the spotlight is currently on Correa, the man who will be in the thick of the debt renegotiations is his new finance minister, Ricardo Patio. The two have worked together before. When Correa was finance minister during a controversial four-month period in 2005, Patio was his deputy for two weeks until Correa was forced to resign in a dispute with President Alfredo Palacios.

Patio is known for his critical views on debt; for many years he led the Ecuador chapter of Jubilee 2000, the international organization that calls for debt forgiveness for poor countries. And like Correa, his main professional experience is in academia. Patio has taught economics at the Guayaquil University and ESPOL, a polytechnic school in Guayaquil. He got his own economic education in Mexico and Spain.

Patio has repeatedly called Ecuadors foreign debt illegitimate. Although the debt default threat may be hollow, it has certainly put Correa and Patio on investors radar screens.

Joachim Bamrud