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Small investors flex their muscles

Emerging market governments can default on their international bonds with impunity. That seemed to be the clear message on August 23 when Ecuador secured the support of 99% of investors for its oVer to swap defaulted Brady and Eurobonds for paper worth 41% less than the old debt.

Investors who held out against the deal have discussed setting up a group to sue Ecuador, but there may be too few of them to make it worth bringing a suit.

"Ecuador came out with a take-it-or-leave-it proposal," says one investor with a close interest. "And investors took it, because no-one had enough of the bonds to make the fight worthwhile."

Ecuador's restructuring follows similar exchange offers by Ukraine and Pakistan, the other two sovereigns which in the past year have taken the previously unprecedented step of defaulting on international bonds.

But then, last month, came a reminder that debt restructuring can get very messy for governments. Elliott Associates, a small US investment fund, had ob-tained an order from a US court in June which allows it to seize any payments from the Peruvian treasury.

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