It seems we live in a world of greater and greater economic and social complexity. Now, as capitalism has entered its fnancialization stage, living under the canopy of Casino capitalism means that debt swaps and debt servitude are imbedded within entire economies — public debt. This includes personal budgets as well – private debt.
Entire countries have now become large hedge fund houses in their rush to obtain, sell and buy natural resources. Events in the world are more and more now a series of cascading financial swaps, debt burdens and mega-financial profits for large financial institutions catering to poverty stricken areas of the globe. ‘Betting’ against an uncertain financial and social future is now the norm. It is called hedging and as we saw in part one of this series, this is precisely what China is doing by securing oil from Ecuador. Yet in reality, the world economy itself has become one big hedge fund as the Casino economy forces ‘insurance’ upon all of its ‘customers’. Everyone now is betting on a brighter future and with little to purchase it with but debt.
The planned economy that the financial class once told us was the essence of communism, socialism and a choke on free-markets is embraced warmly by the new financial capitalists. Why? Simple: it is a tiny cabal that ‘plans the world economy’, or better yet ‘pans’ it, for their own self-interests. Money has trickled up, not down as the Reagan revolution promised. It is at the point where only a small handful of people and institutions are in the financial position to leverage debt and extend credit. The perspiring masses sink further and further into debt servitude while the rentier class sees opportunities in renting everything — the circular society.
As I wrote at Dailycensored:
“In what is called a ‘Circular Economy’, the capitalist class not only owns the means of production, but they also own all the products as well. We would simply rent the products. That way, they get to own EVERYTHING…you are the renter you give back to owner for recycling, you get to rent something else, but you never own it, the corporation owns the product. No longer would they have to focus on building products with planned obsolescence. In the circular economy, the 1% not only succeeds in owning most of the world, but also quite literally the shirt off one’s back as well (http://www.dailycensored.com/the-corporate-elites-at-davos-the-circular-society-and-lets-look-at-what-comcast-is-doing-to-our-society/).
You can see the elite’s plans for the circular economy at: (http://www.mckinsey.com/insights/manufacturing/moving_toward_a_circular_economy).
We are now firmly rooted in what has been called ‘the late stage’ of financial capitalism where betting against this or that event has become the norm. Catastrophe and unpredictability are financial bonanzas for the elites. The average person is unable to plan their economic futures for they have been planned for them. Uncertainty and misery team up as forces that veritably distinguish any reasonable planning by individuals, states or governments, at least planning not keeping with the financial capitalist’s order.
In part two of this series on the Ecuadorian Miracle and the Crisis of Liquidity we will critically examine three issues: One, some economic history of Ecuador that will serve to throw light onto the current economic situation facing the country; two, the Ecuadorian rush to get new credits for public investment from selling bonds in the international capital bond markets, to pay for investments which we highlighted in part one; three, the new role of the World Bank in loaning money to the financially struggling country.
All of these issues go to the heart of Ecuador’s liquidity crisis and the Buen Vivir program launched by Correa. This year alone, the Ecuadorian government has destined $810 billion (56% of this is for health programs) dollars for public investment in social programs and projects that will directly benefit the Ecuadorian people. This includes eight hydroelectric plants that will completely change the nature energy consumption of the country by decreasing reliance on oil in favor of electricity. This is just one major project scheduled to be completed by 2016. There are many more.
However, as stated in Part one of this series, Ecuador has a liquidity crisis and can’t pay for the programs and projects the government has planned or has in planning. The situation Ecuador finds itself in can be traced back precisely to policies by the capitalist class which literally forced Ecuador to its knees.
Some Sordid History of Ecuadorian Economics
As many economists have noted, loan packages and their attached policies proffered to foreign countries, like Ecuador, function to open up the recipient countries to nasty foreign banking interests and foreign corporations and institutions motivated solely by profits, not by human need. The camel gets its nose under the tent and soon the tent is full of some of the most smarmy white collar criminals on earth.
To be sure, these private debt selling entities ballyhoo their financial schemes as ‘services’ when in reality, nothing could be further from the truth. The lending schemes perpetuated by the capitalist system open these recipient countries up to economic volatility and loss of sovereignty as the banking interests and foreign corporations clamor to lower the amount of public investment in favor of private financial capitalism. Tethering countries like Ecuador to the carpet loom of debt and debt servitude is financial colonization and corresponds to the world of financial capitalism’s ‘disservice’ to the world. Debt is now a prime commodity and it is bought and sold every second.
The Country Assistance Plan and the World Bank
Some people might remember Joseph Stiglitz, ex-chief economist of the World Bank. He laid out some time ago how countries like Ecuador were given a “Country Assistance Strategy” by the World Bank (of which 51% is owned by the US).
In an article written by Greg Palast for the UK Guardian newspaper, Stiglitz is very clear what these Country Assistance Plans are all about.
Stiglitz stated that according to the World Bank, there’s an assistance strategy for every poor nation, designed, says the World Bank, after careful in-country investigations. Each nation’s economy is analyzed, says Stiglitz, then the Bank hands every minister the same four-step program. Much of this four step program was covered in Naomi Klein’s bestselling book, “The Shock Doctrine”. Financial ‘aid’ was all contingent on poorer countries literally imposing brutal austerity in every corner of their respective economies and manufacturing misery and despair for the masses of people while the banking institutions and their cronies made huge profits.
In Stiglitz’s analysis, we begin with step one of the four part program: this is wholesale privatization. Stiglitz noted that sell-offs of state industries has historically been demanded by the World Bank in many countries (most notably in the 1995 Russian sell-off of state industries) in order for these countries to ‘get loans’, or go into debt. In the case of Russia, the US-backed oligarchs stripped Russia of its industrial assets with the effect that national output was cut nearly in half. This is ‘financial aid’, but financial aid not for the working class, the masses, not for the country that has been given loans and finds itself now mired in debt — it is for the elite. The rentier class.
Step two is capital market liberalization. What this means is that international investment capital can flow in and out of the host country without messy boundaries or controls. However, as Klein and others have noted, the money usually flows out of the host country into the pockets of the large financial institutions and those who run them, not the other way around.
After the speculators and money men grab the country’s swag, then the IMF thugs move in and demand these debtor-nations raise their interest rates to 30%, 50% or even 80%.
As Stiglitz noted, higher interest rates annihilate property values, brutalize industrial production and drain national treasuries. Slash and burn financial capitalism cares not for the host it parasitically feeds off. Pump and dump is the business plan.
Once this is accomplished, as Stiglitz noted, step three marches into play: market based prices are implemented and prices on food rise, and water and cooking gas prices soar for they are now privatized. This leads, predictably, to what Stiglitz calls ‘the IMF riot’.
As Greg Palast has noted:
“The IMF riot is painfully predictable. When a nation is, ‘down and out, [the IMF] squeezes the last drop of blood out of them. They turn up the heat until, finally, the whole cauldron blows up,’ – as when the IMF eliminated food and fuel subsidies for the poor in Indonesia in 1998. Indonesia exploded into riots” (http://www.theguardian.com/business/2001/apr/29/business.mbas).
More closer to home there are other examples – the Bolivian riots over water prices in the year 2000 and, in early 2001, the riots in Ecuador over the rise in cooking gas prices imposed by the World Bank.
As Palast wrote for the Guardian in 2001:
“What Stiglitz did not know is that Newsnight obtained several documents from inside the World Bank. In one, last year’s Interim Country Assistance Strategy for Ecuador, the Bank several times suggests – with cold accuracy – that the plans could be expected to spark ‘social unrest’.
That’s not surprising. The secret report notes that the plan to make the US dollar Ecuador’s currency has pushed 51% of the population below the poverty line.” (ibid).
The armies and police of the debt ridden recipient country then must assure that all resistance is quelled.
Step four of the IMF/World Bank strategy is ‘free trade’. Stiglitz likens this free trade, by the rules of the World Trade Organization and the World Bank, to the Opium Wars in the nineteenth century. They were also about opening markets for trade.
Stiglitz notes that in the Opium Wars, the West used military blockades to achieve its trading ends. Today, the World Bank can order a financial blockade, which is just as effective and sometimes just as deadly. Financial capitalism is brutal when profits or hostile takeovers are involved..
This deadly four step program, or playbook, is precisely what was implemented in Ecuador.
In his investigations, Greg Palast found a secret schedule in the Country Assistance Strategy for Ecuador. It seems that Ecuador’s government was ordered by the World Bank to raise the price of cooking gas by 80 percent by November 1, 2000. The government had to eliminate twenty-six thousand jobs and cut real wages for the remaining workers by 50 percent in four steps and on a timetable specified by the IMF. By July 2000, Ecuador had to transfer ownership of its biggest water system to foreign operators. It then granted British Petroleum rights to build and own an oil pipeline over the Andes (http://www.skeptically.org/economics/id10.html). Remember, this is all under the auspices of ‘financial aid’!
So how did this all happen? One must go back to at least 1983 when Ecuador was ravaged by national elites who owed millions to foreign banks. The Ecuadorian government was forced to take over the oligarch’s debts and help with the bailout of the U.S. and local oligarchic financial class. To do this, Ecuador’s government had to burrow further down the debt hole and borrow $1.5 billion from the (IMF). This money was then used to pay oligarch debts and bail out many private interests.
For Ecuador to pay back the loan, the IMF took their toll. They dictated a price hike in electricity and other basic necessities. And when that didn’t drain off enough cash, yet another “Assistance Plan” was drafted in air conditioned offices by the elites. This one required the state or Ecuador to eliminate 120,000 public workers. The Shock Doctrine at work.
While attempting to to pay down the mountain of IMF debt obligations, Ecuador was then forced by the IMF to “liberalize” its tiny financial market. This meant cutting local banks free from government controls and regulations and allowing private debt and interest rates explode.
All of this led to the Ecuadorian banking crisis of 1999-2000 when banks crashed liking falling trees all over Ecuador, causing massive suffering among the population as many saw their savings simply vanish overnight at boarded up banks while they lined up sleeping in blankets at closed bank doors.
All of this is documented in internal files at the IMF. And of course, Ecuador is not alone among the victims of ‘financial aid’ and the Shock Doctrine.
Noted author, John Perkins in his best-selling book, ‘Confessions of an Economic Hitman’, devotes several pages of his book to Ecuador. Perkins had a long history with Ecuador and he noted that:
“In the years since I first went there, in 1968, this tiny country had evolved into the quintessential victim of the corporatocracy. We loaned the country billions of dollars so it could hire our (US) engineering and construction firms to build projects that would help its richest families. As a result, in those three decades, the official poverty level grew from 50-70%, under- or unemployment increased from 15-70%, public debt increased from $240 million dollars to $16 billion dollars, and the share of national resources allocated to the poorest citizens declined from 20% to 6%” (John Perkins, Confessions of an Economic Hitman, 2004 page 240. Plume Press).
In 2004 alone, Ecuador was forced to devote 50% of its national budget to paying off its debts as opposed to helping build infrastructure and investing in millions of impoverished people. Jubilee USA, an anti-debt organization has for years stated that “countries are paying debt service to wealthy nations and institutions at the expense of providing these basic services to their citizens” (http://upsidedownworld.org/main/ecuador-archives-49/1627-ecuador-defaults-on-foreign-debt). All of this was truly a ‘Buen Vivir’ program for the rich oligarchs, both national and international, and one that President Rafael Correa has reversed (part one of this series).
Ecuador’s debt default
Ecuador’s military dictatorship (1974-1979) was the first government to lead the country into blinding indebtedness. In November of 2008 a special debt audit commission released a report charging that much of Ecuador’s foreign debt was illegitimate or illegal and encouraged President Rafael Correa to default. The commission found that usurious interest rates were applied for many bonds and that past Ecuadorian governments illegally took out other loans, no doubt skimming money off the top. The report also accused Salomon Smith Barney, then part of Citigroup Inc., of handling the 2000 restructuring of Ecuador without Ecuador’s authorization, leading to an application of 10 and 12 percent interest rates.
The Special Audit Commission also charged that the U.S. Federal Reserve’s late 1970’s interest rate hikes constituted a “unilateral” increase in global rates, compounding Ecuador’s indebtedness. Debt restructurings consistently forced Ecuador to take on more and more foreign debt to pay spiraling and never ending outstanding debt, and at much higher interest rates. Anybody who has taken out a pay–day loan or a student loan knows what it is like to hitched to debt — paying strictly on the interest and rarely paying down the principal; borrowing from one credit card to pay the other.
In over thirty years Ecuador’s debt rose from $1.174 billion in 1970, to over $14.250 billion in 2006, a twelve fold increase,. This was due in large part to interest rates that rose at the discretion of US banks and Federal Reserve from six percent in 1979 to twenty-one percent in 1981. Debt means crisis and crisis for the banks mean profits.
More astounding, is that of all loans made to Ecuador between 1989 and 2006 (the year before Correa was elected President of the country) fourteen percent of them were used for social development projects. The remaining 86 percent were used to pay for previously accumulated debt. Continuously from 1982 and 2006, the country paid foreign debt creditors $119.826 billion for capital and interest, while receiving over the same period $106.268 billion in new loans, which amounts to a total negative transfer of $13.558 billion (http://www.projectcensored.org/10-ecuador-declares-foreign-debt-illegitimate/). Shylocking, the selling of credit or debt as a commodity, is an international business and has been for some time.
Ecuadorian President Rafael Correa clearly agreed with the commission’s findings. Correa pledged early in his administration to prioritize the “social debt” over debt to foreign creditors. This he did in December of 2008 when Ecuador defaulted on its bonded debt of $3.6 billion in the capital markets. Correa declared that the $30.6 million interest payment on $510 million in bonds due in 2012 was an illegal and immoral debt. The default totaled $9.937 billion, 19 percent of the country’s GDP. Commercial debt, or debt to private banks, made up a whopping 44% of Ecuador’s interest payments in 2007, considerably more than the 27% paid to multilateral institutions such as the International Monetary Fund (IMF). The country was clearly in the teeth of the creditors.
At the time of the default, Ecuadorian Kichwas (ECUARUNARI), the powerful Andean branch of the country’s indigenous peoples’ movement understood exactly what the debt crisis was. They could see clearly that public debt was subsidizing some of the most criminal elements in Ecuador while leaving poverty and misery in its wake. They called the foreign debt illegal and illegitimate, stating:
“We have not acquired any debt. The so-called public debt really belongs to the oligarchy. We the peoples have not acquired anything or been benefited, and thus we owe nothing” (ibid).
The decision to default was both a moral and economically charged one. But the morality of capitalist economics is quite the opposite of those whose morality want an economy devoted to people. The capitalist economic analysts immediately voiced their opposition to Correa’s move, predicting the move would hurt Ecuador economically by cutting off access to international credit (more debt) from international banks and multilateral institutions, like the World Bank. In other words, the default would hurt Ecuador’s credit and thus their credit line.
As we saw in Part One of this series, the 2008 default, though it virtually shut the Andean country off from capital markets, opened the door for imperial China to enter the country with cash in hand, and this they did now having become Ecuador’s largest lender.
Many economic analysts have stated that Correa was very clever in defaulting on the international debt. In June 2009, Ecuador announced that it had reached an agreement with 91percent of its creditors to buy back its debt for 35 cents on the dollar. This seemed to confirm the predictions of many analysts that the default was a strategic move aimed at allowing Ecuador to get a “haircut” on their debt. Ecuador’s default had the consequence of driving down the price of the country’s debt, thus making a buyback far more affordable. At the time many also believed that Ecuador had already started to quietly buy back debt on the secondary market, a claim the government has declined to comment on. What we do know is that Ecuador paid approximately $1.075 billion for $3.375 billion in debt (ibid).
The New Ecuadorian Economic Bond Market
It has been six years since the default, but now Ecuador has made a successful return to international capital markets. On June 18th, 2014 the government of President Rafael Correa sold $2 billion in 10-year bonds at a yield of 7.95%. In preparing the way for the return to the international capitalist markets, Correa even gave the green light to the International Monetary Fund to resume annual reviews of the economy. They agreed.
There are two large reasons for Ecuador’s new entry into the bond market. One, Ecuador is seeking sources of funding for the ambitious Buen Vivir, or Ecuadorian Miracle which I highlighted in Part One of this series. Two, Ecuador is trying to show the world that they are not a wholly owned subsidiary of China; that they are not dependent on one source of funding. By selling bonds on the ‘open’ market this then allows the capitalist world to see that Ecuador is diversifying its loan requests – now allowing the international capitalist community to participate in buying Ecuadorian bonds. Correa said in a recent meeting:
“One of the bottlenecks for all nations is funding. If we can go to cheaper financing, and diversify funding sources, it would be foolish not to do so” ((http://blogs.wsj.com/frontiers/2014/06/18/investors-cheer-ecuadors-return-to-international-markets/).
The World Bank is partially responsible for the new bond offerings for they predict Ecuador’s economy will expand 4.3% this year, among the best growth rates in Latin America—but lower than growth of 4.5% in 2013 and 5.1% in 2012. With the imprimatur of the World Bank, investors may actually find Ecuadorian bonds a good investment —that is if one wants to trade in debt. Evidently many do for as of the announcement, more than 200 institutional investors and private banks in the U.S., Asia, Europe and South America are participating in the Ecuadorian bond market (ibid).
Buy selling bonds, Ecuador plans to pay for its generous programs. For 2014, the Ecuadorian government is planning $7.26 billion in public investments. The total investment goal through 2017 is $47.6 billion. 2014’s budget calls for spending of $34.3 billion, including a deficit of $4.94 billion. The National Investment Plan (IAP) 2014 is determined that significant investments will be made in the ministries of Transport and Public Works (roads); Electricity and Renewable Energy (8 hydroelectric) and Public Health and Education (for service contracting works) (http://www.cesla.com/detalle-noticias-de-ecuador.php?Id=11390).
Debt, debt and more debt
Paying close to 8% interest on the new bonds that Ecuador is floating means that Ecuador not only receives cash, but it is burdened by more debt; and all of this brings to mind the ‘crisis of liquidity’ and the actions of the World Bank in prior Ecuadorian history.
Not so, says Macho Villalba, manager of the ecuadorian central bank:
“It is true that the investment plan is ambitious and therefore funding needs are great too, but that does not mean that there are problems of liquidity in the economy, the level of liquidity in the economy are the highest levels in the country’s history” (http://www.telegrafo.com.ec/politica/item/ecuador-sera-mas-agresivo-en-buscar-creditos.html).
With close to six billion dollars of debt, it is hard to understand the logic. Taking on more debt, even if it is diversified, just adds to the problems of liquidity that Ecuador is experiencing and simply puts another cog in the debt cancer cycle. And when the World Bank and the International Monetary Fund are called back on the Ecuadorian stage the whole idea seems crippling, given the history.
The World Bank to the rescue
“The farther we can keep from the IMF and the World Bank, the guiltiest parties in the Latin American debacle of the last 20 years, the better off we’ll be.” Rafael Correa, October 2007
“The World Bank is behind us in financing us because they admire the country’s growth and the economy’s performance.” Rafael Correa, April 2014
We have already looked at how the World Bank and its twin, the International Monetary Fund raped Ecuador of its finances, decimated its society, heaped misery on its people and enriched itself in the process. The ‘Shock Doctrine’ policies of the World Bank were responsible for leaving Ecuador in the quagmire of debt it finds itself in now. However, notices of the early demise of the monstrous World Bank and its involvement with Ecuador were and are premature. The World Bank is back and this time with more money to lend.
The World Bank to lend $1 billion to Ecuador
Ecuador returns to official relations with the multilateral agency, the World Bank, whose presence in Ecuador had been stopped until late last year due to the expulsion of a World Bank representative in 2007. In April of this year, following Correa’s harsh words and the expulsion of the World Bank representative, the World Bank extended a line of credit to Ecuador for $1 billion dollars. The loan from the World Bank is scheduled to finance public accounts and solve the requirements of the latter phases of eight hydroelectric projects that have suffered cost overruns of $2 billion dollars (http://www.ecuadortimes.net/2014/04/08/world-bank-extend-loan-ecuador-1000-million/).
The Quito Urban transit plan and the World Bank
On the heels of the startling World Bank loan in April, in July of this year, 2014, the Executive Board of the World Bank approved a loan of US $205 million to the Municipality of Quito in Ecuador to construct a metro line that will carry 400,000 people a day once the project is built.
The aim is to improve urban transit in the city of Quito (the capital of Ecuador) by increasing demand for public transportation. The ‘Buen Vivir’ project plans to reduce travel times, lower the staggering operating costs of the transportation network and improve the connectivity, safety and convenience of the existing system. The project will also have a positive long-term environmental and health impact, through the reduction in greenhouse gas emissions and pollutants and subsequent improvement in air quality; all good goals and outcomes.
Alongside the World Bank, inputs have also come from the Inter-American Development Bank (IDB), the European Investment Bank (EIB) and the Development Bank of Latin America (CAF), as well as local and government input.
This is the first project of its kind in Ecuador. Correa has made it a national and local priority. It is supported and co-financed by the national government and by the Municipality of Quito. The Quito Metro Line One Project (PLMQ) involves an investment estimated at $1.499.9 billion. The line will be 23 kilometers long with 15 fully accessible stations, six with integrated access to the Metrobus-Q network, and initially be capable of carrying 23,000 people an hour in each direction. Quito Metro Line One will link the principal points of departure and arrival of transit passengers in Quito, and will service an area in which some 760,000 jobs are located (http://www.transport2020.org/newsitem/world-bank-approves-loan-for-quito-metro-project-in-ecuador).
Why has Ecuador sought the help of the World Bank, of all players? The answer is complex but it seems that the crisis of liquidity, along with overreliance on China, has left the Correan government with no choice but to deal with US imperialism. The history of Ecudaorian debt and violation at the hands of the World Bank and the IMF should have been a lesson to Correa and his government.
Alas, the sweltering public debt along with the need to complete social programs has found Ecuador once more within the tentacles of financial capitalism. Debt begets debt and the hope is to attract private capital to allow Ecuador to build industries and emerge as a producer on a world scale.
However, as reported in Upsidedownworld.com, an internet site covering activist politics in Latin America, there may be many reasons for Ecuador’s new partnership with the World Bank:
“There are several possibilities. In rough terms, we can imagine the two ends of a wide spectrum of options. At one end, it could be that the World Bank has over the last few years magically changed the orthodoxy that has been its hallmark throughout recent history, bringing it into line with proposals from “progressive” governments. The other option would be that it is Ecuador that has in reality abandoned the initial tenets of the 2006 PAIS Alliance project, demonstrating significant achievements in line with the demands of urban capitalism, which deserve recognition by the World Bank. In between these two estimations are many others that, in one way or another, encapsulate Ecuador’s growing need for foreign financing (http://upsidedownworld.org/main/ecuador-archives-49/4831-a-reading-on-ecuadors-return-to-the-world-bank).
Has the Ecuadorian Miracle abandoned its initial tenets of 21st Century Socialism? Is Correa falling into a trap in courting the World Bank and opening up international bond markets for Ecuadorian bonds? The former question seems beg for the answer ‘no’ as more and more public works are in process. Unlike under neoliberalism, public monies go directly to the public projects they are architected to support. As to the later question the problem is source of the loans and the cost of the loans.
One thing we do know: institutions like the World Bank and big time bond investors have crossed the border and are back in the country of Ecuador looking for profits. With the history that Ecuador has had with capitalist interests both in the banking sector and with the IMF and the World Bank, it is a safe bet to say that the emergence of another way to rent money, the new Ecuadorian bond market, coupled with the reentry into the country of the IMF and the World Bank and their tricky loan packets, should give everyone pause. Correa is playing with fire and the instituions he is playing with are an admirable adversary having taken the country to the cleaners before.
In part three of this article we will examine the growth of the Coca Cola Company in Ecuador and its role in promising to help the country ease into solvency. We will also look at how Ecuador recently pawned half its gold reserves to criminal Goldman Sachs.