The people of Ecuador are rising up to refound their country as a pluri-national homeland for all. This inspiring movement, with Ecuador's indigenous peoples at its heart, is part of the revolution spreading across the Americas, laying the groundwork for a new, fairer, world. Ecuador Rising aims to bring news and analysis of events unfolding in Ecuador to english speakers.

Friday, November 21, 2008

Ecuador audit recommends default on 40 pct debt

QUITO, Ecuador (AP) — A presidential commission on Thursday recommended that Ecuador default on almost 40 percent of its $10 billion foreign debt, accusing former officials and bankers of profiting from "illegitimate" bond deals.

President Rafael Correa, a leftist U.S.-trained economist, said he would seek to halt payment on the loans and hold foreign investment banks and ex-government officials responsible. He did not, however, declare a default.

He said he would seek to punish those responsible but did not say whether he wants criminal prosecution.

Correa made the announcement on a day he also said he'd impose import duties on 800 unspecified "luxury" goods — on which he said Ecuadoreans spend $1.2 billion annually — and ordered temporary tax cuts and emergency loans for local exporters.

An audit made public Thursday advises Correa's government to default on $3.9 billion in three types of bonds issued as part of debt restructuring in 2000 and 2005. It says the negotiations were opaque and caused "incalculable" damage to the economy.

The report accuses former Ecuadorean officials and investment banks including U.S.-based J.P. Morgan and Salomon Smith Barney, now part of Citigroup Inc., of mishandling the restructuring.

Correa said two sets of bonds, due in 2012 and 2030, were issued without presidential authorization and dates on the documents were altered.

He accused several former government officials of "treason," and said bankers "compulsively induced, threatened, bribed and pressured with all their might to push their loans and make their juicy commissions." Those ex-officials and banks — not Ecuador's government — should be the ones to reimburse bondholders, he said.

"We don't comment on ongoing investigations, but I can assure you that Citi has profound respect for the legal and regulatory environments in the countries where we operate," said Claudia Lima, Latin America spokeswoman for Citigroup, Inc.

A spokeswoman for J.P. Morgan declined to comment.

Correa won by a landslide in 2006 after threatening to default on Ecuador's foreign debt. He has not acted on the threat but he has spent heavily on social programs aimed at benefiting the poor such as monthly payments for single mothers, seeds for farmers and building materials for new homeowners.

Correa recently warned, however, that falling oil prices may force his hand. Oil is Ecuador's top source of foreign income, accounting for 40 percent of the national budget — and prices have dipped 64 percent since July.

He did not specify by how much tariffs on the luxury goods would increase. They are the first protectionist measures announced by a national leader since the global economic crisis began in September.

By presenting a credible default threat, Correa could force bondholders into restructuring, potentially saving his government billions of dollars when access to capital is tight worldwide, said Patrick Esteruelas, an analyst at the Eurasia Group in New York.

Ecuador delayed $30.6 million in interest payments last week, saying it would use a 30-day grace period to assess the results of the yearlong, 30,000-page audit.

The suspension sent Ecuadorean bonds plummeting, prompted Standard & Poor's to slash its long-term rating on the country's debt. Investment in the nation's oil and mining sectors will likely freeze up as well.

A default could affect Correa's leftist ally President Hugo Chavez of Venezuela.

Venezuela holds as much as $230 million in Ecuadorean debt in a national development fund. That investment represents less than 1 percent of Venezuela's $39 billion in foreign currency reserves, but its exposure could be greater, since Venezuela also holds an unknown amount of credit default swaps, or insurance contracts that guarantee against losses on Ecuadorean bonds, analysts said.

Should Ecuador default, Venezuela could owe additional millions to losing bondhonders.

The three bonds in question — due in 2012, 2015 and 2030 — were issued at a time when Ecuador's economy was collapsing and hyperinflation pushed the country to abandon its local currency for the U.S. dollar.

Finance Minister Maria Elsa Viteri insisted that Ecuador currently has the resources to service its debt, including $6.5 billion in foreign currency reserves.

Ecuador's foreign debt is down 29 percent from 2006 and accounts for 21 percent of gross domestic product.

No comments:

Post a Comment