Also important, however, is a series of legal covenants included in bond indentures, which give lenders comfort that they are protected from a wide range of potential abuses. The thousands of individual investors that own Ecuador's sovereign bonds in their savings and retirement accounts relied on the borrower's representations that the debt was authorized by the Ecuadorian authorities—an assurance that is clearly stated in all three of Ecuador's bond prospectuses.

Ecuador also represented that their external bonds were the unconditional general obligations of Ecuador. The country has pledged its full faith and credit toward the payment and performance of its external bonded debt. These bonds rank pari passu among themselves—that is, each has the same rights to repayment as all the others—and at least pari passu in priority of payment with all other present and future unsecured and unsubordinated external debt of Ecuador.

Ecuador has repudiated its external obligations three times in the past three decades. In each of the last two debt workouts, Ecuador received substantial debt relief.

With the 1995 Brady Plan debt workout, Ecuador benefited from a 55 percent reduction in the face value of its defaulted bank loans. The government of President Correa claims that the Brady plan—which provided substantial debt relief to 18 emerging countries on four continents—is illegal and illegitimate. We suspect that most of Ecuador's neighbors would disagree.

In 1999, Ecuador's economy collapsed under the strains of poor financial policies and low oil prices, driving its external public debt and debt service to about 80 percent and 7 percent of GDP, respectively. The government argues that the 1999 default could and should have been avoided, and thus concludes that 2000 debt workout—which resulted in a 30 percent reduction in the face value of its defaulted Brady and global bonds—is illegal and illegitimate.

Now Ecuador has decided to declare a unilateral moratorium on its bonds maturing in 2012 and 2030. The government offers spurious arguments for the legitimacy of the bonds maturing 2015, engineered under the tenure of then Minister of Finance Correa to lower Ecuador's debt-servicing costs. However, creditors and judges in other jurisdictions are likely to disagree with its view.

Ecuador's decision to default on its external obligations rests on purely ideological grounds, as its capacity to service debt is as strong as it has ever been during the last three decades. Ecuador's external public debt is a manageable 21 percent of GDP—of which 8 percent of GDP is from bonded debt.

Selectively choosing to default on a small portion of its external debt obligations is neither fair nor likely to resolve any perceived debt problems. Currently, external debt service is a very manageable 3.5 percent of GDP—of which 0.8 percent of GDP is from bonded debt. Furthermore, Ecuador's international reserves amount to a sizable 10 percent of GDP.

Borrowers seeking to break their contracts must make a good-faith effort to build a consensus among creditors rather than acting unilaterally. Lack of consultation with external creditors could create a very disorderly, protracted process with suboptimal outcomes for both Ecuador and its bondholders.

Proposing a draconian debt exchange, not grounded in economic reality, to a select group of creditors will not lead to meaningful discourse. Quite the opposite, it will merely antagonize bondholders and waste precious resources on legal and advisory fees while endangering Ecuadorian assets abroad.

Could Ecuador and its adviser really believe that bondholders of the 2012 and 2030 issues will agree to a haircut while other bondholders remain untouched? Will official sector lenders participate in this charade? Will other borrowers in the region remain silent as Ecuador further tarnishes the reputation of the emerging market debt-asset class? Only time will tell.