Ecuador purges armed forces and police
I never caught this when in Quito. But it certainly is relevant to the ongoing political developments of Ecuador.
[url]http://www.janes.com/news/security/countryrisk/iwr/iwr080411_1_n.shtml[/url]
11 April 2008
Event: Ecuadorian President Rafael Correa replaced his minister of defence and national police commander on 9 April as accusations of institutional collusion with foreign intelligence agencies plunged the armed forces and police into crisis. The joint chief of staff and the commanders of the army, navy and air force have also resigned.
Correa publicly accused on 6 April the security forces of being "taken over by the CIA", saying Ecuadorian military intelligence officers had passed information to the United States CIA that was subsequently shared with the Colombian government and used to target a raid against the Revolutionary Armed Forces of Colombia (Fuerzas Armadas Revolucionarias de Colombia: FARC) inside Ecuadorian territory on 1 March.
Correa is clearly using the crisis as a pretext for purging the armed forces and police and installing senior officers sympathetic to his political cause. It is also clear Quito is seeking to divert attention from a succession of embarrassing revelations in recent weeks of high-level Ecuadorian collusion with FARC.
Forecast: With Correa loyalists installed, the purge is now likely to extend further into the senior and middle ranks of the armed forces and police, with alleged links to foreign intelligence agencies used as a pretext for extending Correa's political control.
and
[url]http://www.viewswire.com/index.asp?layout=RKArticleVW3&article_id=1403241925&country_id=1790000179&refm=rkCtry&page_title=Latest%20alerts&rf=0[/url]
Summary: The recent removal of the most senior military and police commanders was a high-risk move by Ecuador’s president, Rafael Correa. If it succeeds, it could turn an international humiliation into a domestic political triumph, and help him to further consolidate his grip on power ahead of a constitutional referendum.
and
[url]http://www.worldproutassembly.org/archives/2008/04/ecuadors_leader.html[/url]
For now, at least, the last word on the issue may rest with Mr. Ponce, the rumpled poet thrust into the public eye as Mr. Correa’s new defense minister.
In an interview in Quito, Mr. Ponce, 59, mentioned the moderately leftist governments of Brazil and Chile as potential partners for increased military cooperation, subtly suggesting a reluctance to depend heavily on Venezuelan aid, as countries like Bolivia have done. But he was also clear about relying far less on the United States.
“We must get past our legacy of relying too much on military relations with the United States, with President Bush showing little regard for national borders or sovereignty,” Mr. Ponce said. “The risk of remaining too close to such a partner is one of ideological contagion.”
The Curious Case of Ecuador’s Default – And Why It Matters
[url]http://www.rgemonitor.com/latam-monitor/255019/the_curious_case_of_ecuadors_default__and_why_it_matters[/url]
Thomas Trebat | Jan 12, 2009
One of the questions concerning Latin America in 2009 is whether or not the region will be plunged into yet another dismal round of debt defaults as commodity prices stay low and foreign capital inflows remain frozen solid.
For the skeptics, Ecuador is Exhibit A. In the context of a region that gave birth to the term “serial defaulter”, Ecuador’s mid-December decision to default on its bonded debt is an alarming development.
Unless you happen to own the bonds (and at this point only the most risk-addled investors probably do), ignoring the debt dustup in Ecuador is easy. Hasn’t President Rafael Correa, that scourge of the neo-liberals, been itching to do just this for years? Besides, the amount of bonded debt involved - $3.6 billion, at most, including bonds that Ecuador has probably repurchased – is not a systemic threat. For the casual observer, the action by Ecuador has a sort of hard-to-fathom, out of the blue character. After all, Ecuador was sitting on international reserves of $6 billion at the time it declared default, facing annual interest payments on the debt of less than $400 million. In these circumstances, what really could be gained compared to the costs of default?
Tempting as it is to forget about Ecuador, what happens next there matters a lot for Latin America and for the world. Why? First, dollarized Ecuador really has managed to get its political and economic act more or less together in recent years, say what you will about President Correa. Second, the financial pressures that comprise the default backdrop in Ecuador are similar throughout Latin America. Every Latin American country faces tough choices about how to react to terms of trade losses and the sudden stop in capital flows. Ecuador just happens to be one of the more vulnerable of the Latin economies and it may have in this case made a wrong choice.
We should not look upon the drama in Ecuador as morality play. Yes, the government has argued that the debt is “illegal” and “illegitimate” on the basis of a government study which, it seems safe to say, would be unlikely to fare well in impartial international arbitration. (President Correa, who is running for re-election in April, has warned the people of Ecuador to be prepared for painful retaliation from the international “monsters”, e.g., creditors.) Putting moral considerations aside, this is about how the global credit crunch is harming the commodity-addicted and foreign capital-dependent economies of Latin America.
The bigger economic picture in Ecuador is clear – and very alarming.
First, Ecuador’s exports, mainly crude oil, but other natural resources as well, are collapsing. Magdalena Barreiro of LatinSource Ecuador estimates that if current prices of $30/barrel for Ecuadoran crude oil (see graph below) prevail throughout 2009, the government stands to lose close to $3.4 billion in revenues compared to earlier budget projections based on higher crude prices..
Second, the vaunted international reserve coverage of Ecuador suddenly looks shaky and thin. Since reaching a high point in mid-December of more than $6 billion, reserves plunged to $4.4 billion in just two weeks in December. (See graph below.) The drop could be attributable to the government’s clumsy bond buyback effort, but certainly also it results from balance of payments setbacks. Further declines from this point on in international reserves could risk setting off a run on some $12 billion in deposits in Ecuador’s banking sector as nervous depositors correctly perceive in the reserve erosion a proximate threat to dollarization.
Third, the external financing situation of the government in 2009 is challenging, to say the least. Based on the most recent trends in fiscal spending, the government is looking at a financing need of more than $2 billion this year. (This is assuming that a raft of new spending programs mandated in the new constitution are not funded in 2009, but who knows?) While some of the financing needs could be met internally, Ecuador is going to have to raise significant funding abroad – perhaps as much as $2 billion. And where will this funding come from in the wake of the bond default? Maybe the IADB can provide some help, though that seems unlikely. The word out of Quito is that Iran, Venezuela, and even Argentina could be approached. In other words, Ecuador looks to be heading toward big fiscal trouble without a lot of good financing options.
Summing up, Ecuador presents many elements which in another context led to the collapse of convertibility in Argentina in 2001. Exports, not just crude exports, are falling fast. (The U.S. is the major market for Ecuador.) The government has no access to private lines of credit, no foreign investment to speak of, reserves which are being rapidly depleted, and government financing needs which are very large and likely to grow. Now add to this toxic mix a panicky run on deposits in the banking system and a scenario suddenly appears of an abandonment of dollarization followed by furious running of the printing presses to produce massive amounts of a new domestic currency.
Oddly enough, the Correa government may not find this scenario of de-dollarization (and implicit domestic default) all that frightening, though they would prefer it to occur after the April elections, naturally. Correa and other government officials have talked openly about shaking off the monetary and credit constraints imposed by a dollarization scheme which they inherited. They may be thinking now that they need the ability to create domestic liquidity in 2009 to bail out the government and the private sector, including the banks.
Yet the rest of Ecuador probably sees this scenario of a collapse in dollarization with enormous concern. The same opinion polls that show Ecuadorans in favor of external debt default find that 80% of the population favors keeping the dollar because it has brought a measure of stability to a once deeply troubled economy by protecting their own assets. Yet this confidence on the part of the public has to be seen as fragile, as a banking sector scare in December illustrated clearly.
Maybe dollarization can be sustained through the April elections, but if the adverse global trends continue, for how much longer after that, assuming President Chavez cannot or will not ride to Ecuador’s rescue? And if dollarization succumbs to the crisis, who is to say how severe the subsequent crisis of unemployment and falling real incomes could be in Ecuador? The Argentine economy plunged by 13% in the first year following the exit from convertibility.
I do not think it is worth the risk of waiting to find out how bad things could be in Ecuador. The truth is that global trends battering all of Latin America have backed Ecuador and some of the weaker economies into a tight corner. Some of these economies, or most of these, need some sort of global help – a lender or spender of last resort, emergency lines of credit - to weather the storm. Few of these economies, if any, have the ability to manage their own ways out of the crisis which has befallen them.
If pride and politics can be pushed aside, the wiser course for Ecuador and for the region would be to find some face-saving way to put the default genie back in the bottle and to seek some sort of international assistance in the form of arbitration and backup lines of credit, with a nod from the Obama administration. That could provide needed short-term support for dollarization which has been very positive for Ecuador.
The Bad, The Ugly and the Good
Hi Tung,
Interesting reading your social-political comments, as one of the many who have put your information to very good use in Ecuador and Colombia I'm glad your interests are broader then the classifieds of La Hora...:-)
My opinion?
The Bad: No way Ecuador is coming through this without printing its own currency again. This Correa just dug himself too big of a hole. After the elections April 26 all hell will break loose, unless crude climbs to above 60$ which is not likely come spring and depression in the US and Europe.
The Ugly: Yea sure they are manipulating the bond market, lowering the price and buying on the cheap. If this was a corporate bond they'd all be in jail now and for a long time. Being it's not corporate: fuck the suckers, we all know they never die only change.
Even uglier: This is all a convoluted and additional way for the guys on top to make a bundle for their swiss numbered accounts, in coordination with Venezuelan banks that have sold credit default swaps to the same suckers. After all, nobody's in politics in Ecuador for another reason then to fill their pockets, and they all do just that. Suckers everywhere: Ecuadorians paying taxes and funds/banks/persons investing in Ecuador sovereign debt.
The Good: when they do print currency, provided you earn in greenbacks, your already sweet mongering (and just current) life in Ecuador will turn into pure honey. AAA+ pussy to chose from on the cheap.
Who said there's not a pot of gold at the end of the rainbow?
Keep it up guy, you are an inspiration to all.