Ecuador: Correa sends defiant message to bondholders

COPYING AND DISTRIBUTING ARE PROHIBITED WITHOUT PERMISSION OF THE PUBLISHER: SContreras@Euromoney.com

By:
Chloe Hayward
Published on:

Ecuador’s president, Rafael Correa

Ecuador’s president, Rafael Correa: making a political point

In the next few weeks, Ecuador’s president, Rafael Correa, will decide whether to voluntarily take his country into default on up to $10.2 billion of external sovereign debt, equivalent to 25% of GDP. As the international community holds it breath, those close to the government are more philosophical. "Correa runs as a 21st-century socialist government. He wants to continue sending the message to the people that the poor come before debt," says Antonio Acosta Espinosa, president at Banco Pichincha, the leading bank in Ecuador. "This default threat does exactly that – sends a clear political message to his supporters. I personally think it is a political strategy and that payments will resume in the coming weeks, but I’m expecting that some international court will analyse the legality of some tranches of the external debt." A Moody’s report that downgraded Ecuador’s foreign currency bond rating to Caa1 agrees that the government’s motivation is political and ideological.

On November 14, Correa announced that Ecuador would no longer pay the 12% coupon totalling $31 million on its 2012 global bond. Now the government says it is going to make use of the 30-day grace period to decide its strategy. By December 15, Correa will have decided "if we will keep paying or go the courts".

In many ways this announcement was not a surprise. When Correa first came to office he said that he would not pay if the repayments adversely affected his social spending plans. With the recent collapse in commodity prices – the Ecuadorian oil basket dropped from $132 to $39 – this could have been the case. But the commodity price boom enabled Ecuador to stockpile reserves of $6.2 billion. The country also paid the Paris Club of official creditors $54 million in mid-October.

"I think the surprise is that they’ve made this decision so soon after the fall in oil prices, without trying to look at alternative options"

Stuart Culverhouse, Exotix

"It is not a matter of ability to pay or solvency but clearly a lack of willingness to pay," says Stuart Culverhouse, head of research at Exotix. "I think the surprise is that they’ve made this decision so soon after the fall in oil prices, without trying to look at alternative options."

In 2007, Correa commissioned a report on Ecuador’s outstanding bonds to decide whether some of the debt was irregular and whether a restructuring should be pursued. A final audit report apparently holds information claiming that there are illegalities and irregularities, according to Elsa Viteri, the finance minister.

Venezuela

A default would also affect Correa’s ally and main creditor – Venezuela’s president, Hugo Chávez. Venezuela holds about $800 million in first-to-default structured notes on a basket of countries that includes Ecuador. One phone call from Chávez could therefore stop the default – it is cheaper for Chávez to pay the coupon than risk these losses.

What next? Viteri has reportedly said he does not "rule out the payment or a moratorium". Although many think Ecuador will pay eventually, if Correa sticks to his guns and misses the payment this would trigger selective default and provide Ecuador with the chance to restructure the bonds.

But the strategy of trying to force a bond restructuring is dangerous: "If bondholders refuse to play ball, Ecuador could stumble into a [full-scale] default," says Neil Dougall, research analyst at Dresdner. Culverhouse adds: "I don’t see how creditors would accept this, so it could get very messy."


From the archive: 
Sovereign bond restructuring: The buy side starts to bite back Euromoney April 2001
Sovereign bonds have been successfully restructured by three countries to date. Only one group remains unsatisfied: the bondholders. 

Cracks in the new financial architectureEuromoney April 2001 
Jorge Gallardo, minister of finance and economy of the Republic of Ecuador, offers his views on sovereign debt restructuring.