The fact that there are no international political consequences isn’t really that interesting to me. There will be economic consequences, though hopefully they will be limited to Ecuador.

The short version: Ecuador has the money to pay its debt, but has decided not to. Contrast this with the US, who doesn’t have the money to pay its debt, but continues to try.

Interesting analysis from Felix Salmon:

But never mind Ecuador — what message does this send to the rest of Latin America, not to mention Africa and the rest of the world? The multilaterals seem to be saying that they will embrace any default, no matter how egregious, and that the best strategy for any indebted nation is to simply force its lenders to write off the vast majority of their loans. This is likely to backfire massively not only on the multilaterals themselves — which of course have billions of dollars in debts outstanding to the likes of Ecuador — but also on the countries in question, most of whom who want to be taken seriously but all of whom must now be considered highly suspect credits, given the incentives being put in their way by CAF and the IDB.

I think I’d take the under on that bet (see? I am an optimist). The first point, that other countries may follow suite, is a little short sighted. I think that everyone knows that following suite will make financing debt much harder in the future. The second point is contingent on the first; if nobody else follows Ecuador’s example, there’s no reason not to lend. Of course, any country looking to borrow in the short term might be screwed. It’s going to take other countries re-affirming their commitment to pay to work this out.

But, just so we’re clear: if other countries do follow Ecuador’s example, things are going to get very bad in the US and Europe. It would take a few countries to equal one Lehman-sized problem in terms of debt and CDS dollar amounts, but a Lehman-sized panic may occur after just one or two if they happen in quick succession. The consequences of such a panic would be quite real.