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Rafael Correa is looking for a haircut |
Rafael Correa, Ecuador’s populist left-wing president, who was inaugurated on January 15, has been threatening to default on repayments of the country’s $4.13 billion of commercial external debt. He is also pushing for a haircut on this debt of about 75% (the same level as Argentina forced on bondholders in 2005). However, it is believed that Argentina recently told Correa’s government that the circumstances of his country, which is awash in petrodollars, is totally different from that of Argentina when it defaulted on and subsequently restructured its debt.
Ecuador is also highly enthusiastic about being a founding member of Banco del Sur, the new development bank for South America being spearheaded by Hugo Chávez, Venezuela’s president. It is being set up as an alternative to Washington multilaterals, such as the Inter-American Development Bank and the IMF. Ecuador’s total official debt is $4.14 billion (it owes the IDB the most – $1.83 billion).
Lisa Schineller, director of sovereign ratings at Standard & Poor’s, which in January lowered Ecuador’s long-term sovereign rating to CCC from CCC+ and downgraded its country outlook to negative from stable, says: "The Ecuadorians recently asked the Argentines for help over the debt. They came but recommended that the country did not default. They explained that Ecuador’s situation today is very different from that of Argentina in 2002. Since then, I think Correa has readjusted the government’s plans and there is less talk of a default. It is hard to know at this stage if Banco del Sur would make Ecuador less dependent on the IDB. It already has $1.2 billion of debt with the multilateral the Andean Development Corporation [CAF – headquartered in Caracas, Venezuela]."
Standard & Poor’s says that Ecuador has one of the weakest cultures of payment among the 113 sovereigns that it rates. At the end of 2006, it had outstanding total commercial and official debt of $10.41 billion, and debt repayments absorb more than one-third of the government’s annual budget. Last month the government paid off its remaining $9 million of debt with the IMF.
It has to make $725 million in interest payments and $770 million in payments of principal on all its debt this year. The government threatened to withhold a $135 million interest payment to bondholders on February 15 but in the end made the payment.
Alessandra Alessi, a senior analyst at Moody’s, says: "Moody’s foreign currency bond rating of Caa2 for Ecuador reflects its poor track record in meeting its external obligations and its questionable willingness to pay, despite its improved ability to do so.
"The odds of a successful voluntary or friendly debt restructuring are low given the reluctance of creditors to participate in an exchange prompted by a lack of willingness, rather than ability to pay. Therefore, if the government intends to significantly reduce its debt service obligations, it would be forced to do so via an outright moratorium that could have overwhelmingly negative consequences for Ecuador’s economy."
One of the reasons why Ecuador’s is a different case to 2002 Argentina’s is its general government financial surplus of 1.1% of GDP, swollen by petrodollars (the country’s current gross public debt is 30% of GDP compared with Argentina’s 160% in 2002).
In May 2006, the government of Alfredo Palacios, Correa’s predecessor, confiscated the oil fields run by US company Occidental Petroleum. These produce almost 100,000 barrels of oil per day, about 20% of the country’s total output.
Moreover, in April last year, Congress raised the windfall tax on private oil producers to 50% from 20%. These moves added $2 billion to the government’s coffers and have helped it to run a budget surplus.
The country is in a state of political flux as it digests the results of a referendum held on April 15 that backed Correa’s call to rewrite the constitution in the president’s favour. In March, the legislature tried to delay the poll by sacking the head of the electoral court. The court ruled that move illegal and fired the 57 Congress members who supported it.
Armen Kouyoumdjian, an independent analyst of Latin American countries, says: "I think Correa’s government, if it does not renege on its debt obligations, will certainly attempt to renegotiate them in an aggressive way. It will try to reshuffle their maturities. Whether Banco del Sur will be able to help Ecuador depends on how the new bank is constituted. Will it just lend for new infrastructure developments or will it grant loans that Ecuador could use to service its pre-existing debts?"
Banco del Sur is expected to start operating next month. Chávez’s government has committed seed capital of $1.4 billion to the bank, which is also firmly supported by Néstor Kirchner, Argentina’s populist president.
Brazil has now indicated that it will join the bank (after rejecting the idea last year on the grounds that it would be bureaucratic). Paraguay and Bolivia are also committed to the project, and Nicaragua is being sounded out.
The bank, which is expected to have an initial capital of $7 billion, is being created as a development bank for the continent, but it could destroy the raison d’être of other multilaterals for the region, such as the IDB, CAF and the Financial Fund for the Development of the River Plate Basin (Fonplata is the Spanish acronym).
Peter Hakim, president of Washington think-tank the InterAmerican Dialogue, says: "If the new bank is able to throw a lot of money around the region, I think a lot of Latin American countries will ask what is the point of going to the IDB?"