Journal of International Banking Law and Regulation, Forthcoming
February 28, 2010
Ecuador’s strategic default on some of its external debt last year has drawn much commentary and generated passionate reactions. Some commentators who advocate creating a mechanism for addressing odious or illegitimate debt encouraged Ecuador to repudiate its obligations and have generally applauded its decision to do so. For those who are sympathetic to efforts to create such a mechanism, however, this enthusiasm may be misplaced. Articulating a narrow definition of odious or illegitimate debt is one of the primary challenges for advancing any doctrine or institution that would enable sovereigns to repudiate or discharge obligations on equitable grounds. The obligations that were the subject of Ecuador’s default may have been the product of governmental mismanagement, corruption, or policies designed to benefit wealthier interests in the country over poorer ones. Yet the justifications given for its default do not come close to establishing that its citizens did not obtain meaningful benefits from the underlying transactions or the various debt restructurings that the country experienced in recent decades. In fact, many of the aspects of Ecuador’s indebtedness appear to be conventional results of sovereign borrowing, debtor default, and creditor forbearance. If so, Ecuador’s episode may end up heightening concerns that a mechanism for addressing odious or illegitimate debt would inevitably implicate transactions that are potentially beneficial to sovereigns and their citizens, perhaps making it harder for many sovereigns to borrow for productive purposes. Heightening such concerns only serves to undermine efforts to convince legal actors and policymakers to adopt such a mechanism.