Friday, December 12, 2008

Correa Defaults on Ecuador Bonds, Seeks Restructuring

(Bloomberg) Ecuadorean President Rafael Correa halted payment on foreign bonds he calls “illegal” and “illegitimate,” putting the South American country in default for a second time in a decade.

The government won’t make a $30.6 million interest payment by Dec. 15, when a monthlong grace period expires, Correa told reporters in his office in Guayaquil. The $510 million bonds due in 2012 plunged to 23 cents on the dollar from 31 yesterday and 97.5 cents three months ago.

“I have given the order that interest payments not be made,” Correa said. “The country is in default.”

By defaulting, Correa, a close ally of Venezuelan President Hugo Chavez, fulfills a threat he has made since a 2006 presidential campaign that ended in a landslide victory. His decision comes as a deepening global economic slump throttles demand for oil, the country’s biggest export. Ecuador, which defaulted in 1999, owes about $10 billion to bondholders, multilateral lenders and other countries.

“I couldn’t allow the continued payment of a debt that by all measures is immoral and illegitimate,” Correa said. “It is now time to bring in justice and dignity.”

‘Serial Defaulter’

Correa, 45, said the government will present a restructuring proposal in coming days. “We want creditors to recoup part of their money,” he said.

“Ecuador is moving further into isolation,” said Vicente Albornoz, head of the Cordes research institute in Quito. “The hardliners in the government won.”

A debt commission Correa formed last year said in a 172- page report in November that the global bonds due in 2012 and 2030 “show serious signs of illegality,” including issuance without proper government authorization. Correa invoked the 30- day grace period on the interest payment last month, saying he wanted to analyze the commission’s findings.

“Ecuador is a serial defaulter,” said Arturo Porzecanski, an international finance professor at American University in Washington. “They defaulted in the 1980s, 1990s and this decade. A lot of other countries have had one or two defaults, but Ecuador tops them all.”

Correa, who holds a doctorate in economics from the University of Illinois at Urbana-Champaign, has said he will not sacrifice spending on health and education to pay the debt. Ecuador’s foreign obligations are equal to 21 percent of its $44 billion gross domestic product. Argentina’s debt, by comparison, was equivalent to 150 percent of its GDP when it defaulted in 2001, according to Goldman Sachs Group Inc.

‘Just Political’

Oil, which has plunged 67 percent since July amid the global financial crisis, accounts for about 60 percent of Ecuador’s exports. Finance Minister Maria Elsa Viteri said on Nov. 18 the country’s fiscal accounts remain “strong and healthy.” Ecuador had $5.65 billion in cash reserves as of Dec. 5, according to the central bank.

The default was triggered by the combination of the decline in oil with “a ridiculous ideology,” said Claudio Loser, the former director of the International Monetary fund’s Western Hemisphere department, who now is a scholar at the Inter- American Dialogue. “The financial need wasn’t so great that it was forced to declare a default,” Loser said.

The South American country has defaulted six times since it separated from Gran Colombia in 1830, according to “Debt Defaults and Lessons from a Decade of Crises,” a book published in 2007 by Federico Sturzenegger and Jeromin Zettelmeyer.

“It’s a final blow to external investors, and particularly any energy investors that may have retained interest or had future plans to attempt an investment in Ecuador,” said Enrique Alvarez, head of Latin America fixed-income research at IDEAglobal Inc. in New York.

Possible scenarios after Ecuador debt defaul

(Reuters) - Ecuador declared default on its 2012 global bonds on Friday over charges the debt was illegally contracted by past governments, leaving investors to deal with its second debt default in less than a decade.

President Rafael Correa's decision to not pay a $31 million coupon on the government's 2012 bonds means the country's two other global bond issues due in 2015 and 2030 are also considered in default, according to cross-default clauses in the contracts.

Here are some of the possible scenarios that Ecuador could face after its default:


Many bond-holders will quickly file lawsuits to seize Ecuadorean assets or freeze bank accounts held abroad for payment.

Angry bondholders, who know Ecuador has enough money to make the payments, would tackle the government's U.S. dollar reserves held abroad and oil exports, which could deplete a key source of revenue.

Ecuador has said it is prepared for any legal action in case of a default, but analysts say bond-holders could still inflict much damage to the country's economy via attachments.

Argentina is still fighting suits filed by bondholders who didn't agree to the government's restructuring of its debt after it defaulted in 2002. In October, a judge froze Argentine private pension fund investments in the United States based on a request by bondholders seeking payment.


Ecuador could follow up with a tough renegotiation of the defaulted global bonds, demanding a hefty "haircut" or reduction of the original value of the three bonds that are worth around $3.8 billion in total.

Analysts say President Correa's main goal since he started threatening nonpayment was to restructure the global bonds to lower their value and extend maturities. The socialist is known as a tough negotiator, meaning talks could take years.

Still, many bondholders could reject a final restructuring offer and rely on the courts to ensure payment.


Ecuador's private sector will struggle to gain access to international credit already scarce due to the spreading global crisis. Many major companies in manufacturing, agriculture and services could move to neighboring Peru and Colombia to get better access to loans and expand their businesses.

Foreign mining companies could struggle to jump-start major projects in Ecuador as investors's mistrust of the government will hurt financing. Oil companies will also refrain from major investment, analysts say.

Less foreign and domestic investment will further hurt an economy that has already seen its revenues cut due to a free-fall in oil prices. A souring economy could trigger political instability in a country where the last three presidents were toppled by street and congressional turmoil.


Many multilateral lenders will limit credit to Ecuador, which will increase its reliance on loans from friendly nations like Venezuela already struggling with its own finances due falling oil prices.

Correa had already complained that the Inter-American Development Bank delayed the approval of loans to monitor the government's default threats. Other multilateral such as the World Bank will likely shut down credit to Ecuador, analysts say.

Less credit and lower oil prices will make it harder for the government to finance its 2009 national budget, meaning it would potentially cut social spending that has been key for Correa to build a strong popular support base.

Ecuador will also struggle for years to issue new debt in international markets, possibly until another government takes office.

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