Ecuador’s Default, New Rules Hurt Bond Market

By Stephan Kueffner

Jan. 8 (Bloomberg) -- Ecuador’s second debt default in a decade and changes to debt issuance rules are undermining the local corporate debt market, said Monica Villagomez, Chief Executive of the Quito Stock Exchange.

The December default, after Ecuador had met its debt repayment schedule during President Rafael Correa’s first two years, undercuts investors’ confidence, she said in an interview today in her Quito office.

“After the default, investors stepped back a bit and new issues haven’t been placed at 100 percent,” she said. “That’s the logical impact of the loss of confidence in the country.”

Following the default on $3.9 billion in sovereign bonds, the government has sought alternative means of financing including new domestic bond issues. While some measures that could boost capital markets are under discussion, constitutional changes and a new financial security law could outweigh those plans, she said.

Trading volume on the Quito bourse rose 40 percent in 2008 to $2.53 billion, with fixed-income securities accounting for 96 percent of trading.

Ecuador’s small capital market lacked the exotic derivatives that undermined other markets such as the U.S. and could attract foreign investment, Villagomez said.

“It’s an uncontaminated market, with simpler, more transparent structures,” said Villagomez. “To take advantage of that situation however one would need strong institutions and legal security.”

Financial Security

Recent legislation and constitutional changes however make it unlikely for that to happen, she added. A new financial security law that went into effect on Dec. 31 by the legislature ends the government’s obligation to sell bonds on the stock market.

The market risks losing reference prices, which could end up driving yields higher, said Villagomez. “What we’re most worried about is transparency.”

The main buyer of government bonds, the state-run Social Security Institute, may in the future sign off on deals that could be questioned in public due to the lack in transparency, she added.

Reforms to the judiciary have also reduced investor confidence, particularly since the constitution passed last September also prohibits international arbitrage, leaving only local courts that have a questionable track record, she said.

Planned securitization of mining concessions and a new investment law under consideration could yet provide some support to local markets, Villagomez said.

“These are two very positive proposals,” she said. “There are good signals coming from the government and we need to work with them.”