Ecuador Seen Pushing for Harsh Haircut

Moody’s has downgraded Ecuador to Ca with a developing outlook from Caa1 on review for possible downgrade and expects significant losses for bondholders. “The new Ca rating for Ecuador, the second lowest in Moody’s rating scale, expresses the likelihood that expected losses will be very high to bondholders, placing Ecuador’s default much closer to that of Argentina in 2002 than that of Uruguay in 2003,” says Moody’s senior analyst Alessandra Alecci. “We expect negotiations with bondholders to be complicated and drawn out with bondholder participation in an exchange perhaps limited by the country’s solvency and its unclear grounds for default,” she adds. “We expect the government to propose a very aggressive 80%-90% reduction in principal and a strong and likely protracted legal battle to ensue, with bondholders trying to enforce their claims against an admittedly solvent and liquid debtor that is not experiencing any form of financial distress,” says Goldman Sachs in note Tuesday. “That is, the default was triggered by manifest ideological and dogmatic unwillingness to pay not any clear economic or financial need for debt relief,” it adds. Ecuador’s debt indicators are among the most favorable in the region and compared to similarly rated peers around the world, says Moody’s. The debt-to-GDP ratio stands at around 23%, well below the 85% level during its previous default in 1999 and Argentina’s 150% prior to the 2002 default, according to the agency. Measured against central government revenues, Ecuador’s debt burden is small at 100%, compared to over 500% in 1999.