Socialism/Communism: On the march to poverty

Disaster By Default
By INVESTOR'S BUSINESS DAILY Posted Monday, December 15, 2008 4:20 PM PT

Latin America: Ecuador lived up to its reputation as a banana republic Monday by defaulting on sovereign debt it easily could have paid. It looks like the real plan may be to bankrupt its own private sector.

On its face, Ecuador's default on $3.8 billion in bonds looks like rank stupidity. Sovereign defaults, after all, are rare, and almost always the result of a nation running out of cash. Not Ecuador. Monday's default is its second in eight years, and its seventh in 178 years as a nation.
But unlike other defaults, Monday's stiffing of investors is based on unwillingness, not inability, to pay. Flush from high oil earnings, the tiny Andean state has $5.6 billion in reserves and public debt at only 33% of GDP. It could easily pay if it wanted to.

The problem is President Rafael Correa, a radical leftist with a Ph.D. in economics from the University of Illinois at Urbana-Champaign. His aim is total state control. By defaulting, he's trying to end Ecuador's use of the dollar and shut down the private sector by depriving it of investment. Both bode ill for the country's future.

Correa scurrilously claims that the debt is "immoral" and the lenders are "monsters." His thin reed of reasoning is that the debt was illegally contracted, and he says he'll see them all in court.
That could take decades. What won't take that long is the impact of the default on Ecuador's private sector and its 300,000 or so businesses that export fish, shrimp, coffee, flowers and other goods.

They'll lose access to international credit for trade financing, based on the knock-on effect of sovereign default across a country.

Whole supply chains will be disrupted for exporters. Importers will lose their 45-day window for payments and be forced to pay in advance. Ecuador is already rated by the World Bank as one of the world's lousiest places to do business, ranking 136th out of 181 economies in its 2008 survey, and this will make things worse.

Larger companies can reincorporate in better-run countries like Peru and Colombia, but small entrepreneurs will go under. On top of this, Ecuador is in line to lose duty-free export access to the U.S. due to Correa's refusal to cooperate in the war on drugs.

Defaulting also damages Ecuador's ability to use the dollar as its currency because it lessens the income stream of export cash.

"To keep dollarization working, you need foreign currency from commodity exports, as well as remittances and trade finance," Edgar Teran, Ecuador's former foreign minister, told IBD from Quito. "If you close off any of these sources of income, you will spend more dollars than you draw into Ecuador and the government will say, 'We won't use dollars anymore.' "
Fiat currencies and devaluation are next, he said, which is what Ecuadoreans fear most.
This will isolate Ecuador from the world. Correa has enough reserves to keep the government going for a while. He's also sidling up to global troublemakers Iran and Venezuela for additional sponsorship.

This only makes sense if the aim is to get rid of the private sector. This is about par for a Marxist who wants to nationalize an economy and create an all-powerful state. But it's also a road to ruin.