Debt default: Nielsen criticizes Ecuador


Chloe Hayward
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Argentina’s restructuring veteran says debt default plans are unrealistic

Ecuador has begun the task of restructuring its defaulted debt but aspirations to get the same haircut that Argentina achieved in 2005 appear unrealistic according to Guillermo Nielsen, who was one of the architects of Argentina’s controversial debt restructuring.

Ecuador defaulted on its 2012 and 2030 bonds when it missed a $30.6 million interest payment that was due on December 12 – although it has promised to service payments of its 2015 bond. The decision to default was taken after a commission reported that these two bonds were "illegitimate" and recommended the action. Ecuador has $10 billion in foreign debt – $3.9 billion of this was deemed illegitimate by the audit report.

Not a precedent

Now Ecuador wants to restructure the outstanding defaulted debt. Last month it hired Lazard Frères, the French bank that was involved in the preliminary stages of Argentina’s debt restructuring programme. Argentina managed to get a 70% haircut on its defaulted bonds in a transaction that was accepted by 76% of its creditors. Ecuador’s government, led by Rafael Correa, also wants a 70% haircut. But few think Argentina has set a precedent that Ecuador can follow, including Nielsen.

Guillermo Nielsen, who was Argentina’s finance secretary between 2002 and 2005

"If the Ecuador government wants to get a good haircut on their defaulted debt, like Argentina did, I think it is being totally unrealistic"

Guillermo Nielsen

"I am not familiar with the situation, but if [the Ecuador government] wants to get a good haircut on their defaulted debt, like Argentina did, I think it is being totally unrealistic," says Nielsen, who was Argentina’s finance secretary between 2002 and 2005. "In Argentina’s case there was an implicit sentiment that it had no choice but to default, and so most bondholders were happy to get something of value and tradable in financial markets. It was obvious then that our debt could not be paid and a simple rollover wouldn’t have worked. We needed major surgery. I don’t think this is truly the case in Ecuador today."

Default ill-advised

When Correa initially said he was considering a default in early 2007, advisers, including Nielsen, counselled against this action. "In January 2006, at the request of some Ecuadorian businessman, I looked at Ecuador’s macro figures and conveyed to them that a default just wouldn’t have stood up then. I advised them to improve tax collection and maybe restructure a couple of bonds," says Nielsen.

Economic data show that Ecuador’s public external debt and total public debt, at 23% and 29% of GDP respectively, are not especially excessive. The country also has $5.65 billion in cash reserves. Some analysts believe tumbling oil prices and ambitious spending programmes have led the government to push for a restructuring.

"It isn’t clear how Ecuador is going to try to restructure this debt, but whatever happens it will be messy. I think this default is nonsense. The market sees it as politically motivated," says Stuart Culverhouse, chief economist at Exotix.

"I can’t see creditors accepting the level of haircut Ecuador is seeking. It clearly still has money and hasn’t tried any other alternative routes to avoid a default," he adds. "It’s a question of willingness to pay rather than ability."