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Capital Markets

Ecuadorean debt: President threatens to put life before debt

Ecuador’s president, Rafael Correa, has an important decision to make in the coming weeks: whether social spending should take precedence over debt repayments.

Investors are becoming more pessimistic about Correa’s willingness to honour Ecuador’s debts, especially as there are doubts about how market friendly his new economy minister, Wilma Salgado, is compared with her predecessor, Fausto Ortiz, who resigned suddenly last month.

Ortiz’s resignation was reportedly in response to the government’s hard-line attack on the Isaias group, an important commercial group headed by brothers Estefano, Roberto and William. Isaias had assets seized after the government claimed it owed $661 million from the 1998 financial crisis. In total, 200 companies were reportedly seized, of which two were television companies that have been critical of the president in the past. The president claims all these companies will be sold to help investors recover lost savings. Estefano Isaias claims all debts to the government have been repaid in full.

"Correa won his election on a populist mandate and so every time he seizes assets from a big company or threatens to not pay external debt, he wins votes," says Elizabeth Stephens, political risk analyst at insurance broker Jardine Lloyd Thompson.

In September, Correa is holding a referendum on a new constitution. With Hugo Chávez’s humiliating referendum defeat in Venezuela in December high on Correa’s mind, some think this might be driving the recent seizures.

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