Ecuador Default Risk Ratchets Up

With oil plunging and 2009 debt maturities looming, Ecuador bond prices suggest an increasing likelihood of default on some $3.7bn in debt next year. Ecuador’s 2012, 2015 and 2030 global bonds were bid around 35, 40, and 28, respectively Tuesday, according to traders. Both ability and willingness to pay are diminishing, as the sovereign is expected to release soon results of a study that suggests the external debt is illegitimate. “The probability of default is high. The market is already pricing this in,” says David Spegel, head of EM strategy at ING. He adds that sovereigns generally could take a cue from corporates and use poor external conditions as an excuse to default. Carola Sandy, analyst at Credit Suisse, does not expect a decision before legislative elections in January and February. Her shop expects Ecuador to make its next payment of $125m on the 2012s next month. If oil prices stay low into 2009 and president Correa decides against cutting spending, Ecuador would have to tackle the problem head on. Multilateral debt, which Ecuador has used heavily in the past, could provide a solution, as neighboring Colombia agreed recently to borrow $2.4bn for 2009 from three multilaterals. Ecuador is also heard preparing to challenge creditors in Ecuadorian and international courts, following its own study that alleges that much of the debt is invalid. A debt moratorium would only save Ecuador $470m in 2009, according to local research boutique Analytica. But the process appears to be politically motivated, so cost may not be an issue. If it comes down to a restructuring, creditors can expect an approach as aggressive as Argentina’s in 2005. The take-it-or-leave-it gambit from Buenos Aires left investors with little more than 30 cents on the dollar.