How to really solve a debt crisis: Ecuador defaults on "illegitimate" foreign debt

This is an old but interesting news outlining a solution to the debt crisis you people deserve to read and know. Kudos to the president of Ecuador, Rafael Correa for setting a great example to all nations across the globe, but sadly, many nations such as Greece still ignore the real solution set by Ecuador of solving a debt crisis, by not paying off "illegitimate" debt and in Greece's case, 99.9% of its debt is illegitimate, most military due to the fear of Turks.

http://news.bbc.co.uk/1/hi/7780984.stm
Ecuador defaults on foreign debt

Ecuador is to default officially on billions of dollars of foreign debt it considers "illegitimate", says President Rafael Correa.

Mr Correa said he had given the order not to approve a debt interest payment due on Monday, describing the international lenders as "monsters".

The president said that some of Ecuador's $10bn debt was contracted illegally by a previous administration.
It is the first debt default by a country in Latin America since 2001.

At that time, Argentina failed to repay debt in the midst of its financial meltdown.
Restructure planSpeaking in the city of Guayaquil, Mr Correa said "as president I couldn't allow us to keep paying a debt that was obviously immoral and illegitimate", according to the AFP news agency.

"We'll present a proposal to restructure the debt in order to resolve this problem as fast as possible," added the US-trained economist and ally of left-wing Venezuelan President Hugo Chavez.

His decision follows a government audit in November which recommended that Ecuador default on almost 40% of the $10bn foreign debt, accusing former officials and bankers of profiting irresponsibly from bond deals.

The country's foreign debt amounts to about a fifth of its Gross Domestic Product, or GDP.
In the past, Mr Correa has vowed to put money he has earmarked for spending on public programmes - ahead of paying foreign debt.

Correspondents say Ecuador's decision to effectively cut itself off from outside financing could lead to a budget shortfall, especially if the price of oil - the country's main revenue earner - continues to fall.
Oil is Ecuador's main source of income and accounts for 40% of the national budget.

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What do you guys think of this? Most debt is illegitimate anyway so why doesn't every developed or developing nation get together and decide not to pay the debts or ten world worth economies they owe to central banks?

What are the bankers going to do if five billion people oppose them?

The real solution to the banking game is to move to a non-monetary system with a resource based economy.

 

What are we gonna do when they wise up an' quit buying our paper?...

U.S. Government's Foreign Debt Hits Record $5.29 Trillion
August 16, 2012 - - The money the U.S. government owes to foreign entities rose to a record $5.2923 trillion in June, according to data released by the U.S. Treasury Wednesday afternoon.

 

Deregulation began in the 1970s. That's when investment banks such as Goldman Sachs were small private concerns, the partners put up their own money, and invested it wisely. The financial crash happened and the markets locked up after repeated deregulation, allowing investment bankers to gamble with other people's money.

Dusty

 

What went wrong?...

Debt and the crisis: How did governments get it so wrong?
2 November 2012 - The UK is not the only country whose government ended up borrowing much more than expected

 

You really dont have a clue. Investment banks have always gambled with other peoples money.

 

Live within our means? The horror!

 

Dusty1000 is on to something. He just can't explain it properly. What he means that trouble started when Glass–Steagall Act was repealed.

 

Dusty1000 is on to something. He just can't explain it properly. What he means that trouble started when Glass–Steagall Act was repealed.

 

You really dont have a clue. Investment banks like Goldman could gamble with other peoples money before and after
Glass–Steagall and Glass-Steagall really had no effect upon Goldman until AFTER the collapse when they became a regular bank holding company. And it wasnt in the 1970s

 

You are right that it was not in the 1970's... wrong about the repeal of Glass-Steagall though. Of course investment banks could "gamble" with other peoples money prior to the repeal .. the difference is in the type of gambling and risk that was allowed and who was allowed to do the gambling.

Retail banks for example were not in on the game which was the primary cause of the subprime bubble and subsequent meltdown coupled with high leverage and certain forms of derivatives and lack of regulation.

 

This is simply untrue.

As someone who has worked in the financial industry for a decade, I can assure you that there was no lack of regulation. In fact, when I first started, I was blown away by how large the regulatory compliance department at our institution was. The financial industry has been one of the most regulated industries for decades. People look at specific & isolated examples of bills that repeal certain regulations, and [falsely] assume that the industry on the whole lacks sufficient regulation. This isn't true.

Moreover, the repeal of Glass–Steagall had nothing to do with causing the financial crisis. If anything, it helped cushion the blow for those financial institution that took advantage of it. What the repeal of Glass–Steagall accomplished was allowing lending institutions to participate in the securities, investment banking, trading, etc business. In other words, it allowed them to diversify their business activities. As it turned out, the institutions which were the most diversified were the ones who made it through the crisis relatively unscathed, while firms like Lehman and Bear Stearns, which were not diversified, did not.

If you want to find the real culprit behind the excessive risk taking, look no further than deposit insurance (which creates moral hazard because individuals know their deposits are insured and thus have no incentive to monitor the performance and/or risk taking activities of their lending institution) and the implicit assumption of a federal bailout (which also creates moral hazard.)

 

Huh?

Also, the use of those derivatives you are referring to exploded as a result of regulation (IE their use was an unintended consequence of regulation.) Clearly the solution to this is ... more regulation!

 

Where's the asymmetric information problem?

 

You are the one who does not have a clue. I worked in Wall Street. I was part of the problem before I left. I worked in Securities Lending. We covered short term lending with Mortgage backed securities. I know from experience.

 

Wrong answer buddy. The problem started with the community reinvestment act. Banks were forced by the government to make loans to people who had no business owning a home in the first place. Government forced lending institution to make bad loans.

All hell broke loose when people were able to make bad loans and stick it to someone else. They could make bad loans and not suffer for the bad decision. It was someone else problem.

Lending worked for 500 years with a problem because bankers operated on a simple premise. Never lend money to someone who can't pay you bank. But the Democratic Party thought that they knew better.

 

It's not a problem of information asymmetry. It's a problem of distortion of incentives.

 

I've written endlessly about the CRA and how it was terrible policy and how the majority of Presidents since the 80s have contributed to the problem by trying to increase homeownership at any cost. So we are in agreement there. But the CRA was one out of many contributing factors.

 

An ignorant reply as moral hazard is reliant on information asymmetry. We can conclude that your comment was based on ignorance

 

You guys want to know how to stick it back to the banks, and keep us from paying for their mistakes?

http://www.economist.com/blogs/freeexchange/2012/06/economic-history


We need a new global Marshall plan. We need to take the profits away that were made from fraudulent transactions. Wipe the slate clean, and start over.

Of course this will never happen because our systems have been completely rigged, but don't worry because your right to lobby, and donate money to political campaigns is as safe as it ever could be!

 

A particularly ignorant comment. Why do you think you fellows can come out with crap and think people will go 'woooooooo'?

 

where am I wrong, or do you just have mud to sling with zero substance?

 

Actually, we can conclude that you are unfamiliar with economic/financial terminology beyond introductory textbooks. Moral hazard has been a term used regularly by economists (in the absence of asymmetric information) when referring to the financial crisis. Hell, Paul Krugman did it over a decade ago in his book "The Return of Depression Economics."

You are incredibly uneducated.

 

I just know what I'm talking about. That may seem rather unusual when we have the likes of you huff and puff without knowledge. Moral hazard is an example of hidden action; it requires asymmetric information by definition (which of course is the norm)