SUCRETIZATION: CHARACTERISTICS AND CONSEQUENCES IN ECUADOR - HISTORY - 2025

The sucretization was a process by which the Ecuadorian State assumed private external debt. In this way, the country took over the loans that some businessmen, bankers and individuals had contracted with foreign financial entities.

The end of the oil boom of the 1970s had left the Ecuadorian economy in a worrying situation. At the end of that decade, and even with oil sustaining its accounts, the private sector had assumed significant debts with international private banks.

Oswaldo Hurtado - Source: Ecuador University

This caused serious imbalances, aggravated by the unfavorable international situation at the beginning of the 1980s. The response of the Ecuadorian government, under the mandate of Oswaldo Hurtado, was the so-called sucretization, by which the State took charge of the debt in exchange for certain conditions that, later, were not met.

According to most analysts, sucretization was very negative for the country. To begin with, its debt grew enormously, as did inflation. On the other hand, there were many cases of fraud, since many businessmen and individuals took advantage of the government's measure to obtain benefits that did not correspond to them.

characteristics

During the decades prior to sucretization, Ecuador's economy had gone through various stages. Thus, in the middle of the century the external debt reached 68 million dollars, but the presence of foreign capital was proportionally very small.

The seventies represented a change of cycle in Ecuador. They began to give more importance to the industry, carried out an agrarian reform and modernized the administration. At that time, credits for public works were granted by the IDB. Despite this, Ecuador turned to the IMF nine times for credit between 1961 and 1972.

As early as the 1970s, Ecuador benefited from the oil boom and from state participation in the economy. The country grew an average of 10% each year. In 1974 he was able to cancel the so-called debt of independence, although two years later the ruling Military Junta again resorted to foreign credit.

In this way, when democracy returned to Ecuador, the new governments inherited a very high public external debt. This was also joined by private debt, considered unpayable. To make matters worse, the oil crisis had a very negative impact on the State accounts.

The 80's

The creditors of this new debt were the transnational private banks. The IMF, to ensure that it was paid, put pressure on Ecuador and the rest of the Latin American countries in various ways.

Furthermore, the international context was very unfavorable for Ecuadorian economic interests. On the one hand, the interest rates on loans granted in the 1970s increased to 18%, increasing the external debt. On the other, as mentioned, the oil market began to decline.

After the world crisis of 1982, international private banks and financial organizations established a series of measures to avoid the collapse of the system.

The main one was the creation of loan mechanisms that arranged the refinancing packages, to which must be added the granting of new loans for the payment of interest.

Added to this was pressure from the financial organizations themselves to apply austerity measures and strict adjustment programs. These were under the supervision of the IMF.

In Ecuador, private debt rose considerably. In 1979 it was 706 million dollars, while in 1982 it reached 1628 million.

Assumption of external debt

The conjunction of several factors caused a great debt crisis in Ecuador in 1982: the increase in interest rates, the fall in oil exports and the restriction of access to the capital market. As on other occasions, the country tried to renegotiate its debt.

Finally, the government of Oswaldo Hurtado made a decision in 1983: to assume the private debt in dollars of businessmen, bankers and individuals. In exchange for the State taking charge of what they owed, the beneficiaries had to pay their equivalent in sucres to the Issuing Institute, with very low interest rates, something they never did.

In this way, Ecuador fully assumed the private debt of businessmen, leaving the State with no room for economic maneuver.

The expanded "sucretization"

Febres Cordero replaced Oswaldo Hurtado in office. The new president extended the advantageous payment conditions for the sucretized foreign debt that his predecessor had arranged.

In this way, the payment terms went from 3 to 7 years, so repayments had to start in 1988. Similarly, the interest rate froze at 16%, when commercial rates were at 28%,

Consequences

Although many authors point out that the Ecuadorian government, under pressure from the IMF, did not have many options, the vast majority agree that sucretization had very negative consequences for the country's economy.

It is estimated that the losses rose to 4462 million dollars and, in addition, the benefits to the private sector were extended in 1984 and 1985 without legal authorization from the Executive. In addition, there were numerous episodes of fraud due to poor control of the process.

Increase in public debt

By assuming the private external debt, the State saw its own public debt increase in a very important way.

When the sucretization took place, private debt with the exterior represented 25% of the external liabilities. The cost to the State of assuming these liabilities was 4,462 million dollars, according to the Commission for the Comprehensive Audit of Public Credit (CAIC) in 2008.

Existence of fraud

The mechanism put in place by the government to carry out the sucretization of private debts gave rise to numerous frauds. In order to be eligible for the State to assume their debts, it was only necessary for those affected to register. This caused many people to take advantage and obtain benefits that did not correspond to them.

To this was added the appearance of alleged external creditors who granted certificates of non-existent debts.

Main beneficiaries

According to the experts, in the list of the beneficiaries of the sucretization appear many entities without any relation with the productive activities. This suggests that there were a significant number of people who took advantage of the measure.

On the list appear from publishers to construction companies, as well as large commercial houses. The total number registered was 2984 sucretizers. Among them are prominent people from Ecuadorian political life.

As for banks, the one that benefited the most was the Pacific Bank, followed by Citibank and Banco Popular.

Inflation

Among the negative effects of sucretization, the increase in inflation stands out. This was due to the increase in sucres that occurred when transforming the obligation. This inflation was another added benefit for those who took advantage of the process, since they had to pay their debt in a devalued currency.

Between the sucretization and the subsequent debt swap, inflation reached levels never seen before in the Ecuadorian economy. This caused a recession whose effects, according to economists, still affect the country.

References

1. Acosta, Alberto. Ecuador: The "sucretization" process in Ecuador. Retrieved from alainet.org
2. Berries, Santiago; Somensatto, Eduardo. Ecuadorian sucretization program: history of the monetary effects of the conversion of the foreign debt of the private sector. Recovered from bce.fin.ec
3. Drafting Economy. The sucretization inflated the debt by 93%. Obtained from eltelegrafo.com.ec
4. Simon Cueva; Julían P. Díaz. The Fiscal and Monetary History of Ecuador:

   1950–2015. Recovered from bfi.uchicago.edu

5. Younger, Stephen D. The economic impact of a foreign debt bail-out for private firms in Ecuador. Recovered from tandfonline.com
6. Department of Politics University of Sheffield. Postneoliberalism in the Andes: The Ecuadorian Management of its External Debt. Recovered from epositorio.educacionsuperior.gob.ec