Ho hum, here's another case of socialist "idealism" running into cold, hard reality--and the latter winning. A few weeks ago, Ecuador's President Rafael Correa decided to default on sovereign debt that he believed was "illegitimate" despite having some money left over to pay the interest. As you'd expect from this open-minded commentator, I am not passing judgment yet. It may even be a nice ploy given the fractious politics common to the developing world: label your predecessors' fiscal excesses "illegitimate" and stick it to the (white) man by defaulting. Depending on how these bonds were issued, various countries will have differing abilities to give lenders a haircut.Of course, they will also have to consider their ability to access credit in international capital markets after pulling such a stunt. (Argentina which Ecuador is presumably following the example of has been continually embroiled in legal entanglements.) The latest on these bonds is that the Ecuadorean government wants to use a reverse auction process to repurchase these bonds, giving investors a minimum 70% loss or "haircut" in bond trader parlance.
You'd think dyed-in-wool leftists are all rushing to hail Correa as the next Fidel Castro and whatnot, but such is not the case. No sooner had Ecuador defaulted on its debts did it embark on a policy giving foreign mining giants more access to contested lands. I guess "screw the gringos" doesn't work as well during lean times when collecting royalties counts for more than socialist principles. Indigenous peoples and environmentalists--the usual protagonists in socialist morality plays--are up in arms:
Ecuador President Rafael Correa on Thursday said he will not back down from a recently approved law that encourages mining and has sparked protests by Indians and environmentalists. The new law slaps royalties on mining companies and lifts a nine-month ban on exploration that hurt the stock price of companies operating in the Andean nation. Foreign mining companies have found massive gold, silver and copper deposits in southern Ecuador.Viva la revolucion - and buy some mining stocks while you're at it, comrade ;-)
"It is necessary to propel responsible mining," Correa said during his state of the state to the assembly. "I will not back down on the mining law." Correa has to ratify or make changes to the new mining law approved by the assembly earlier this week. The socialist had threatened to veto the law if lawmakers made deep changes to the legislation.
The law sets at least 5 percent royalties based on sales and boosts government controls over the nascent sector. The law could spark new anti-mining protests by Indian groups and environmentalists who say the legislation favors foreign companies over poor communities and threatens the country's pristine environment. Sometimes violent protests have kept investors worried over the development of the sector.
Worldwide mining companies are slashing investment plans and selling assets to keep much-needed capital as international credit grows scarce and the price of industrial metals plummet on fears of global recession. Miners including Corriente Resources and Kinross sit on multibillion dollar metal deposits, but analysts say the development of those projects could be delayed due to the global crisis.
