Ecuador Risk Revives

Ecuador’s president Correa has ramped up the rhetoric about annulling debt that is deemed illegitimate. “The risk to bondholders is that by making these statements, Correa may put himself in a position from which it will be difficult to backtrack,” says Credit Suisse. Ecuador is apparently questioning the legitimacy of bonds issued in the 2000 restructuring. “Noise surrounding the illegitimacy of the debt will likely increase when the Debt Committee issues its final report (in about 45 days, according to Correa) and ahead of the referendum to approve the new Constitution,” adds CS. Once the committee issues its final report, the government is expected to take punitive actions against all those who were involved in the contracting of illegitimate debt, as well as take civil and administrative action to annul any debt that is deemed illegitimate. “We do not look for Ecuador to unilaterally default on the debt, but headline risk increases as the referendum on the new Constitution approaches and populist rhetoric become more frequent,” says Merrill Lynch.