Ecuador Social Security to Buy $500 Million in Bonds

By Stephan Kueffner

Dec. 29 (Bloomberg) -- Ecuador’s Social Security Institute will buy about $500 million in new government bonds after it purchased $700 million of the securities last week, institute President Ramiro Gonzalez said in an interview with Radio Quito.

The institute, known as IESS, spent the $700 million on Dec. 24, less than two weeks after the government defaulted on foreign bonds. The IESS bought $350 million each of two securities -- six-year bonds that pay an interest rate of 6.5 percent and seven-year bonds that pay a rate of 6.75 percent, Gonzalez said.

“We wanted interest rates above the 6 percent average return we are currently receiving,” Gonzalez said today. “To maintain returns at those levels at a time when interest rates have gone to the floor is a very good investment for Social Security.”

Ecuador, which defaulted on foreign debt for the second time in a decade on Dec. 12, plans to sell as much as $1.5 billion in new government bonds in the domestic market. While the default and the plunge in the price of oil, Ecuador’s top export, have constricted government access to funding, the IESS doesn’t have enough cash available to buy all the debt, Gonzalez said.

While it still has close to $1.2 billion in cash on hand for investments, the IESS is barred by law from investing more than 50 percent of that money in the public sector, he added.

President Rafael Correa skipped a $30.6 million interest payment due this month on a foreign bond and said he’d demand a steep discount from holders to restructure the government’s $3.9 billion of international securities.

The government, which is obliged to pay 40 percent of pensions -- about $450 million a year -- in April paid close to $900 million to the IESS in overdue payments. The IESS estimates that the government still owes it $4 billion, Gonzalez said.