Yearly Archives: 2008

President Correa of Ecuador says he will not pay a $30.6m coupon on the sovereign’s 2012 bonds that is due today, putting the country in technical default of all of its sovereign debt. The move will allow holders of the 2012 notes to seek an acceleration of full payment of the $510m in bonds, and triggers cross default clauses on its 2015 and 2030 notes, which brings the total amount of sovereign debt in technical default to $3.8bn. The announcement coincided with a 10 point drop in the country’s three classes of sovereign bonds to around 23 cents on the dollar Friday, according to sellside trading desks. In calling for a renegotiation of terms on its sovereign debt, some of which it has declared illegitimate, the Correa government may seek a larger haircut than the 66.3% Argentina achieved in its 2005 renegotiation, says Siobhan Morden, LatAm debt strategist at RBS. “Ecuador officials have said the Argentine level wasn’t enough,” remarks Morden. The analyst says Ecuador’s decision to default is driven by the fact that next year’s oil revenues will likely drop by $3bn, and that national elections will be held. As such, the government is seen diverting money away from debt service to finance its short term political objectives, she notes. Debt service accounts for only 7% of Ecuador’s budget. As such the country would have to achieve a substantial haircut to realize any financial benefit from the default. “The decision to go into default is not due to fiscal pressures, falling instead straight into the category of unwillingness to pay given that external debt service payments are minor (just US$400 million in 2009) and the government is still in a comfortable cash-flow/liquidity position,” notes Goldman Sachs analyst Alberto Ramos.

Ecuador’s economy will be the chief victim of its government’s decision to default on $3.8bn in sovereign debt, say analysts. “International banks will starting to close off lines to local banks, independent of how good they may be,” notes Ramiro Crespo, a partner at Quito-based Analytica Securities. “The logical thing to do would be to pay the coupon and then sit down to talk,” he adds. The longer term implications of the debt moratorium will also be substantial. “The default decision coupled with a mix of nationalist, inward-looking, heterodox policies is likely to lead to sub-par economic performance in coming years which significantly increases the risk that dollarization as an FX regime might not survive in the medium term,” according to Goldman. The move is likely to lead to fast and swift action from the ratings agencies, which already have the sovereign rated at CCC. Ecuador’s default marks the region’s second default in only seven years. But since the country has already long been on the fringes of LatAm’s political and economic spectrum, the move is unlikely to spook investors into fleeing the rest of the region’s economies and markets, say sellside analysts. “One concern is that this lowers the bar for defaults,” says RBS debt analyst Siobhan Morden, who notes Ecuador is already using Argentina’s default level as a reference point from which his discussions on renegotiation will depart. Correa said over the weekend he would seek a far larger haircut than what Argentine bondholders took in that country’s debt restructuring.