When the rhetoric didn’t go away, however, the bonds started to fall – and then Correa’s finance minister, Ricardo Patino, held a disastrous meeting in Quito with Citibank clients, in which he talked openly of offering them perhaps 40% on the dollar in a future restructuring. The price of the bonds fell to the 70s, and the markets braced themselves for a default on February 15, when a $135 million coupon payment was due on the 2030s.
Eventually, Ecuador announced that it would make the coupon payment, but not on time: the $135 million would arrive within the 30-day grace period, which is written into the bond contract. Then, on February 15, the day the coupon was due, the money arrived from Ecuador. Minister Patino, interviewed on Ecuavisa television, sounded as if he had just decided to choose the chicken rather than the fish. “Yesterday morning the deputy economy minister said to me, ‘Ricardo, we have the money to pay the interest on the bonds; do we pay?’” He said. “Let’s pay.”
The markets breathed a very small sigh of relief. However, the bonds still trade only in the mid-80s, at a yield of 12% – stratospheric compared with an EMBI Global yield of 6.45%.
The Ecuador administration still asserts that much if not all of Ecuador’s foreign debt is illegitimate, and therefore subject to restructuring. (It’s not clear how restructuring would stop the debt being illegitimate, since it has already been restructured twice since the original loans were taken out in the 1970s and 1980s.) President Correa has said repeatedly that it is immoral to spend money on debt service when poor Ecuadoreans are starving. And for all that the February coupon payment on the 2030s arrived on time, no one has any faith in the timely arrival of any future payments.
“With a single stroke of the budget pen, senior status bonds were transformed into subordinated debt,” says Adam Lerrick, a visiting scholar at the American Enterprise Institute who represented Argentine bondholders during that country’s restructuring. “Ecuador wants to send a message to the world: the poor take precedence. Governments have the right to prioritize spending.”
But Ecuador might find it hard to send that message to the world. If it wants to do an Argentina-style restructuring, it will have to offer to swap its old bonds for new ones with a lower coupon or face value. And in order to orchestrate such an exchange offer, Ecuador will need both legal and financial advisers on board.
Historically, Ecuador has used New York law firm Cleary, Gottlieb, Steen & Hamilton as its financial adviser but Cleary was in charge of the 2000 exchange that Ecuador now says was illegal, and it’s far from certain that the firm would be willing to represent Ecuador in an entirely opportunistic default. (With oil prices high, there’s no question about Ecuador’s ability to pay its debts: the only question is over its willingness to do so.)
And the legal side of the equation is easy compared with the financial side: it’s hard to think of an investment bank that would take on a default-exchange mandate from Ecuador, so alienating hundreds of its most important buy-side investors. One possibility is boutique investment bank Houlihan Lokey, which recently closed a successful debt restructuring for Belize, and which has few buy-side clients – but the Belize operation was both necessary and market-friendly, while any Ecuador operation would be neither.
Correa has a lot on his plate already: he’s in the process of setting up an assembly charged with rewriting Ecuador’s constitution, and says that he will resign if his supporters don’t have control of it. The best hope for bondholders at the moment is that he will keep his promise, and resign before he gets around to defaulting. But if Correa manages to hold on to power, a whole new chapter in the history of sovereign debt defaults might well begin.
