The announcement from Jamil Mahuad, the president of Ecuador, that the country would not meet a coupon payment on its Brady bonds due at the end of August and that Ecuador intends to restructure its $13 billion of foreign debt, has dismayed banks and investors across the developed world.
No sovereign has yet defaulted on its already-once-restructured Brady debt. The Brady deals of the early 1990s marked a decisive step forward for many emerging-market borrowers which had defaulted on their bank loans, rehabilitating them into the abundant liquidity of the international bond markets. A Brady default might mark an equally dramatic step back into the dark times.
Dire warnings are being offered to Ecuador: defaulting on bank loans is a mere indiscretion - banks always come back for more in the end - but defaulting in the bond markets might deprive Ecuador of that vital source of financing for decades...
