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.

Tuesday, December 16, 2008

Ecuador May Hit ‘True Monsters’ Harder Than Argentina

By Lester Pimentel and Stephan Kueffner

Dec. 15 (Bloomberg) -- Ecuador may saddle investors with the biggest losses in a government bond restructuring since at least World War II after President Rafael Correa fulfilled a two-year pledge to default on debt he calls “illegitimate.”

The country’s three dollar-denominated bonds, with a total face value of $3.9 billion, fell below 25 cents on the dollar following Correa’s announcement on Dec. 12 that he wouldn’t make a $30.6 million interest payment due today, according to JPMorgan Chase & Co.

Investors expect to recover less than the 30 cents that Argentina paid in a 2005 settlement that was the harshest since the war, according to Arturo Porzecanski, an international finance professor at American University in Washington. Correa said in a Dec. 13 radio address that he wants to force a “big discount” on creditors, a group he referred to a day earlier as “true monsters who won’t hesitate to crush the country.”

“You have to assume he’s going to continue to play hardball,” said David Bessey, who manages more than $8 billion of emerging-market debt for Prudential Financial Inc. in Newark, New Jersey. It may take Ecuador the “better part of a decade” to regain access to international capital markets, he said. “It’s a rare thing to not pay when you can.”

‘Again and Again’

The default is Ecuador’s second in a decade and seventh in its 178-year history, according to a study by Federico Sturzenegger, a former secretary of economic policy in Argentina, and Jeromin Zettelmeyer, a former assistant to the Western Hemisphere Department director at the International Monetary Fund. In 1999, Ecuador halted payments on $6.5 billion of bonds that had been restructured just five years earlier.

“It’s practically the same obligation being discounted and forgiven again and again,” Porzecanski said. “It could well end up being a more punishing restructuring than Argentina has delivered.”

While a five-month, 70 percent plunge in oil, the South American country’s biggest export, has crimped revenue, the government can still pay its debts, said Matias Silvani, who helps manage $12 billion of emerging-market debt at JPMorgan Asset Management in New York. Ecuador has $5.3 billion of foreign reserves, according to the central bank.

Total debt of $10 billion equals about 21 percent of the country’s gross domestic product today. Its debt equaled 97 percent of GDP in 1999. Argentina’s debt had swelled to 150 percent of GDP when it halted payment on $95 billion of bonds in 2001, the biggest sovereign default ever.

Vulture Lawsuits

Ecuador’s default in 1999 “was due to a solvency issue,” Silvani said. “Now they do have the money to pay. This is a purely willingness to pay issue.”

Ecuador paid bondholders 60 cents on the dollar in a restructuring in 2000, double the 30 cents Argentina paid five years later. About 25 percent of bondholders rejected Argentina’s offer and the country is still unable to access international capital markets as it fends off creditor lawsuits.

Correa, a 45-year-old economist who won election in 2006 promising to spend on the poor before paying debt, said Dec. 13 that his government is preparing to defeat legal challenges from “vultures.” The day before, he ordered officials not to make the $30.6 million interest payment due today on $510 million of 12 percent bonds maturing in 2012.

The bonds were “always structured for the benefit of the creditors, trampling on the national interests, dignity and sovereignty of our countries,” Correa told reporters in Guayaquil. “It is now time to bring in justice and dignity.”

Prayed, Lost Sleep

He had invoked a one-month grace period on the interest payment in November, saying he wanted to analyze an audit commission’s report on the legality of the debt. Correa, who counts Venezuelan President Hugo Chavez among his closest allies, said in his radio address that he prayed to God and “lost a lot of sleep” as he weighed his options.

The commission, which the president created last year, said in a 172-page report in November that the bonds due in 2012 and 2030 “show serious signs of illegality,” including issuance without proper government authorization.

Those two securities were sold in the 2000 restructuring. Correa, who earned a Ph.D. at the University of Illinois at Urbana-Champaign, also said after receiving the report on Nov. 20 that the 9.375 percent bonds due in 2015 are marred by irregularities. Government supporters chanted “we owe nothing” and “the debt is paid” as Correa spoke in Quito that day.

Annul the Debt

“This country is not one where the culture puts any value on paying debt,” said Michael Atkin, who helps oversee $12 billion of fixed-income assets as head of sovereign research at Putnam Investments in Boston.

The 2012 bonds plummeted today to 18 cents on the dollar from 32 cents a week ago and 95 cents three months earlier, according to JPMorgan. The $2.7 billion of bonds due 2030 and the $650 million of bonds maturing in 2015 both sank to 20 cents today.

The government also withheld an interest payment today on the 2015 bonds, invoking the 30-day grace period, Finance Minister Maria Elsa Viteri said. Standard & Poor’s lowered the rating on the 2012 bonds today to default and said in a statement that it would wait till interest-payment deadlines on the other two bonds expire before assigning them a default rating.

Ecuador will present a restructuring proposal to creditors “in coming days,” Correa said Dec. 12. He said the government would simultaneously try to have the debt annulled in international courts, an effort that Porzecanski said has little chance of success.

Correa’s “been pretty outspoken in showing a lack of interest in working with bondholders,” said Prudential’s Bessey, who declined to say if he holds Ecuador bonds. “It’s hard to imagine he would turn around and pursue a friendly restructuring.”

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