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Editorial: No need to panic

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 into the future, perhaps even permanently.

At a stroke, the agenda has been set for this year's annual IMF/World Bank meeting in Washington: what are the consequences for emerging-market borrowers and for private-sector creditors if the world moves decisively into a post-Brady era of sovereign bond defaults?

In truth, few outside the country care much about Ecuador.

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