(Originally published in Bloomberg News)
By Nathan Gill
(Bloomberg) — Not even the endangered white-bellied spider monkey can escape the lingering consequences of Ecuador President Rafael Correa’s decision to default on $3.2 billion of debt four years ago.
Correa, who hasn’t borrowed from the bond market since calling Ecuador’s creditors “true monsters” in 2008 and faces a record $3.68 billion budget deficit this year, said last month the nation needs to start oil drilling in Yasuni National Park to help finance public spending. The park, one of the world’s most-biologically diverse and home to Ecuador’s biggest population of the spider monkeys, also sits on 920 million barrels of oil worth an estimated $18 billion.
Ecuador, which tripled government spending since Correa took office in 2007, has financed itself by borrowing from China, multilateral lenders and pensioners since its default. While dropping a plan to refrain from oil exploration in Yasuni has incited protests from groups trying to protect the Amazonian forest, Correa can avoid paying the average 9.8 percent in annual interest bond buyers demand to hold 10-year debt of countries that share Ecuador’s B credit rating.
“The government has financing problems,” Roberto Villacreses, an analyst at the Ecuadorean Institute of Political Economy, said by telephone from Guayaquil, Ecuador. “Without the default at the beginning of Correa’s administration, we would have other credit sources now.”
Political Economy Minister Patricio Rivera didn’t respond to an interview request made through his press office. Finance Minister Fausto Herrera declined to comment on the oil plan and referred questions to Rivera.
With 41 percent of the rural population living in poverty, the OPEC nation needs money from drilling to aid the poor and invest in industries that will reduce the economy’s dependence on oil, Rivera said at a Sept. 3 congressional hearing.
“The economy’s Achilles heel is its need for dollars,” said Rivera, who served as Correa’s finance minister from May 2010 until April. “Ecuador needs to guarantee an adequate dollar supply to go faster in the fight against poverty, to change the industrial structure.”
Correa, a 50-year-old former economics professor, said as early as October 2010 that the government was considering a return to international debt markets to help finance the budget. Ecuador’s ambassador to the U.S., Nathalie Cely, said in May that the Finance Ministry may sell bonds in late 2013 or early 2014. The government hasn’t said how much it intends to raise or what interest rates the notes would carry.
The extra yield investors demand to own Ecuador’s $650 million of dollar-denominated bonds due in 2015 instead of similar-maturity Treasuries rose three basis points, or 0.03 percentage point, to 651 basis points at 12:22 p.m. in New York, according to data compiled by Bloomberg.
The park, home to two indigenous tribes living in isolation, is inhabited by about a third of the Amazon’s reptile species and a quarter of its amphibians. The Yasuni shelters endangered and vulnerable species such as the giant river otter, Amazonian manatee and the yellow-spotted river turtle. The white-bellied spider monkey’s population has dropped at least 50 percent over the past 45 years due to hunting and habitat loss, according to the Gland, Switzerland-based International Union for Conservation of Nature.
The animals could be hurt by the roads and pipelines built to reach the oil blocks as hunters, loggers and colonists push deeper into the forest, according to Kelly Swing, an ecology professor at the Universidad San Francisco in Quito and founding director of the university’s Tiputini Biodiversity Station in the Yasuni.
“Any kind of human presence causes impacts on the fauna, and usually if we’re talking about large species then they’re the ones that are impacted first,” Swing, who’s spent almost 20 years researching in the Yasuni, said in a telephone interview. “If we decide to just go ahead and do oil extraction, and do it in the same old way, then we’re probably going to get the same old results, which means devastation horizon to horizon.”
Correa had presented a carbon-dioxide abatement plan to the United Nations in 2007 that called for blocking development of oil fields in the park. The plan, which was supported by celebrities including actors Bo Derek and Leonardo DiCaprio, sought $3.6 billion in contributions from the international community in exchange for protecting the park in perpetuity.
After collecting only $13.3 million in donations, Correa said Aug. 15 that the project was a failure.
“Sad day, but fight is not over,” DiCaprio said in a message on his Twitteraccount following Correa’s announcement. “Correa abandoned Yasuni, but people of Ecuador have not.”
Lorena Tapia, Ecuador’s environment minister, didn’t respond to a telephone and e-mail messages seeking comment.
Correa has promised to minimize the environmental impact of oil drilling, saying state-owned oil producer Petroamazonas will use “responsible” extraction techniques.
Both of the country’s two oil pipelines have sprung leaks this year, dumping more than 15,000 barrels of crude into the nation’s rivers.
Extra revenue from drilling in the Yasuni could support the government’s efforts to sell bonds by bolstering its ability to repay creditors, according to Vicente Albornoz, dean of the Universidad de las Americas business school in Quito.
“Access to new oil fields makes the country a better credit,” Albornoz said in a telephone interview from Quito. “The government needs more revenue for the future, so drilling in the Yasuni seems totally coherent to me.”
Tapping the Yasuni’s oil fields is an easier solution to the government’s financing needs than trying to sell bonds, according to Carlos Andres Baca, an analyst at Quito-based economic and political consulting firm Politik.
Selling new debt “means generating certain conditions of trust that I think the government rightly judges as being difficult,” Baca said in a telephone interview from Quito. “They know it’s not going to be an easy sell.”