Local Economy to Bear Brunt of Default

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.