(This article was co-written with Chris Cook; although the final presentation was done by me, so I have mangled his ideas somewhat!)
The basic story: Ecuador's government is pissed & angry with the debt issuances of previous governments: accusations of bribes, misconduct, EHMs, etc. And, they are broke, or broke enough to suggest default. And it was an election promise!
So why not default? Let's run the thought experiment.
Argentina did it, and survived, or at least that theory is popular in some circles. If this were to happen, what do future partners do, like Venezuala, or the emerging Banco del Sur? Kick the Ecuadorean's sorry tail all the way to Galapogas islands, join them in default, or think about how to adopt?
It needn't be that way. The fundamental problem is that the debt has migrated from an honest contract to a dishonest circle of mutually supporting pieces. This structure no longer helps any of the participants. So here's a plan to help any bankrupt country to move to the future:
This is a good future model for banks. p2p investment has higher margins, and the banks do not have to risk their own capital to play. Indeed that's where they want to be, c.f., securitization, and we could argue they are already there.
But, where they are now, the risks are not properly spread to those who care for the instruments, so, say hello to financial crisis.
We just have to go the next step by engaging the players end-to-end. The real essence is to move the financial issuance of debt across to a flexible creation of debt/equity balanced contracts between issuers and investors. The details are for later.
(It goes without stressing, in this new financial structure, we would need the ability for smaller issuers to create flexible contracts together.)