Ecuador Calls foreign Debt 'Illegal,' Defaults on Payments

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But relations between Brazil and Ecuador have been tense since the September expulsion of the Brazilian firm Odebrecht over accused accusations of shoddy work on a hydroelectric plant and contract violations. Most recently, Ecuador filed suit in the International Chamber of Commerce to stop payment on a $286 million debt to The Brazilian National Bank for Economic and Social Development (BNDES), credit that was allotted for Odebrecht’s hydroelectric project. Many activists in Ecuador see Brazil as a regional bully.

Last month, a special debt audit commission released a report charging that much of Ecuador's foreign debt was illegitimate or illegal. The commission found that usurious interest rates were applied for many bonds and that past Ecuadorian governments illegally took other loans on. The report also accused Salomon Smith Barney, now part of Citigroup Inc., of handling the 2000 restructuring without Ecuador's authorization, leading to the application of 10 and 12 percent interest rates. Ecuador's military dictatorship (1974-1979) was the first government to lead the country into indebtedness.

Commercial debt, or debt to private banks, made up 44% of Ecuador's interest payments in 2007, considerably more than the 27% paid to multilateral institutions such as the International Monetary Fund (IMF).