Ecuador’s Tools to Challenge Debt Limited, Olmos Says

By Stephan Kueffner

Nov. 24 (Bloomberg) -- Ecuador would find challenging its foreign debt in U.S. courts difficult because the country signed away its legal rights in bond agreements over a 20-year period, a debt auditor said.

Halting debt payments without the support of a court decision would be a “catastrophe” for the nation, Alejandro Olmos, a member of a committee appointed by President Rafael Correa to review the debt, said in an interview after a speech today in Quito. Bondholders could seize Ecuador’s assets, including those of state-owned oil company PetroEcuador, he said.

“If he doesn’t pay, it will be because he has sufficient legal backing to do so,” said Olmos, an Argentine who previously investigated his home country’s foreign debt. “If no possibility exists for a legal contest, he unfortunately will have to accept that and he will have to pay.”

Ecuador on Nov. 15 didn’t make a scheduled bond payment, invoking a 30-day grace period even though it has the money to meet the obligation.

The price for the 2012 bond fell to as low as 14 cents on the dollar on Nov. 14 after the government’s most recent threats to default on about $4 billion in debt. The bond recovered to about 26 cents on the dollar last week.

Bond Rise

Ecuador’s debt paced gains among emerging market bonds today after Olmos’ comments, rising 0.75 cent to 27.25 cents.

Correa, a 45-year-old economist with a U.S. doctorate, has questioned the legitimacy of Ecuador’s foreign debt and vowed not to repay “illegal” and “illegitimate” bonds.

Still, he has framed the criticism around the chances of winning lawsuits against foreign banks that were counterparties in debt renegotiations from the 1980s.

“If Olmos is saying that Correa will stick to the legal chances, then the odds are that’s what he intends to do,” said economist Jaime Carrera, head of the Quito-based Fiscal Policy Observatory. “This, however, is a totally unpredictable government.”

The debt audit, published on Nov. 20, says that much of the debt is illegal because usurious rates were charged; bonds were issued without proper government authority and without registration with the U.S. Securities and Exchange Commission; and that numerous conflicts of interest existed among lawyers, lenders, and government officials.

Reviewing Options

Lawyers from Ecuador and the U.S. are reviewing the country’s options.

“I’m confident that the president’s advisors will be able to break this and that some legal action will be undertaken in the U.S.,” Olmos said. “It’s however my responsibility as a member of the committee to say that there are severe limits and that this will not at all be easy.”

In several contracts reviewed by the commission, Ecuadorean officials signed away all rights to a legal action, including a trial by jury, weakening its position under U.S. law, Olmos said.

“Unfortunately there are parts of the contracts that hold Ecuador hostage,” said Olmos, who said that his sole payment for the work on the audit was the payment of expenses.

The 172-page audit discloses so much “fraud” that it could embarrass bondholders into accepting a “substantial” cut to the debt load, he added. The 15 authors of the debt committee include Ecuador’s Politics Minister Ricardo Patino and Central Bank board member Karina Saenz.

Patino last week said that the government could seek renegotiation talks with creditors. The country’s three global bonds -- the securities due in 2012, 2015 and 2030 -- total $3.9 billion out of a total foreign debt of about $10 billion.

It’s not clear whether the government, which this year has pursued a hard line in negotiations with companies including Mexico’s America Movil SA and Brazil’s Petroleo Brasileiro SA, in fact wants to renegotiate the debt, Carrera said.

The government has painted itself into a corner by promising voters it won’t pay the unpopular bonds even though it will be cheaper to repay them than to default, he added.

“Whether it decides to default or decides to pay, the government will end up losing face in the decision,” he said.

To contact the reporter on this story: Stephan Kueffner in Quito at skueffner@bloomberg.net