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.

Thursday, November 20, 2008

Ecuador default-talk may force restructuring

QUITO, Ecuador (AP) — Ecuador's flirtation with a $10.3 billion foreign debt default may force bondholders into restructuring, potentially saving the government billions of dollars at a time when access to capital is increasingly tight.

Ecuador is going to "present a credible threat of default and force bondholders to renegotiate the terms of existing debts, winning savings and considerable benefits for the state," Patrick Esteruelas, an analyst at the Eurasia Group in New York, said Wednesday. "Bondholders are desperate for cash and ready to accept a significant reduction in nominal terms" to salvage their investments, he said.

Ecuador delayed $30.6 million in interest payments last week, using a 30-day grace period to assess the results of a 30,000 page audit of its debt contracts, to be made public on Thursday. Government officials have suggested the debt may be "illegitimate," and Finance Minister Maria Elsa Viteri on Tuesday refused to rule out the possibility of a complete default.

The move sent Ecuador's benchmark bonds plummeting.

President Rafael Correa won office in 2006 vowing to default on Ecuador's foreign debt to free up more money on anti-poverty programs. He has not acted on that threat, but recently warned that falling oil prices may force his hand. Oil is Ecuador's top source of foreign income, and prices have dropped 60 percent since July.

Viteri acknowledged that traditional credit flows may disappear if Ecuador does default, but said the country could turn to OPEC or even its own banking system to raise capital instead.

Ecuador rejoined the Organization of Petroleum Exporting Countries in 2007 and will take advantage of that membership, Viteri said without giving details. Local banks meanwhile have $4 billion in assets, and the government could in theory require them to use that cash to buy its bonds.

"The government seems to think it will access other sources of financing, but in a default situation, it's not that easy to negotiate," said Lisa Schineller, director of sovereign debt ratings at Standard and Poor's, which downgraded Ecuador's debt three notches to CCC- last week.

Correa has suggested that previous governments mishandled debt negotiations for personal financial gain, and ordered an audit of the country's debt contracts in July 2007. Investigators have since found evidence of abuses and irregularities tied to almost all Ecuadorean bonds, audit chair Hugo Arias said this week, justifying his committee's default recommendation.

Ecuador currently has the resources to service its debt, including $6.5 billion in foreign currency reserves. Budget shortfalls are expected next year though, as oil has slipped to less than half of the government's forecast.

"We have a range of possibilities," Viteri said. "You should be completely sure that we're going to evaluate each and every one of the risks."

Others see few options for Ecuador.

"Who is going to loan to Ecuador if it isn't reliable?" Ricardo Duenas, an economic analyst for consultancy Capital Management Solutions in Quito, told Quito-based Radio Democracia. Failure to pay "generates a brutal lack of legal security."

No comments:

Post a Comment