Ecuador Risk of Dropping Dollar Rising, Bulltick Says

By Lester Pimentel

Feb. 27 (Bloomberg) -- Ecuador is increasingly likely to drop the U.S. dollar as its currency this year after the government’s debt default, according to Bulltick Securities Inc.

The likelihood of Ecuador abandoning the dollar has risen to more than 70 percent from less than 10 to 20 percent a year ago, Alberto Bernal, head of fixed-income research at Bulltick Securities in Miami, said in a report.

President Rafael Correa’s decision to default on international bonds in December and a plunge in crude oil, Ecuador’s biggest export, have spurred capital flight, Bernal said. Ecuador adopted the dollar in 2000 to help curb inflation after the sucre tumbled 73 percent against the dollar and the government defaulted on $6.5 billion of foreign debt.

“The bottom line here is that if Ecuador is forced to leave dollarization at some point in the next few months, the likely collapse on economic activity in the country could become very significant,” Bernal said. “We continue to think that the days of the dollar in Ecuador are numbered.”

In December, Correa defaulted on a $30.6 million interest payment for the country’s 12 percent bonds due in 2012, saying the securities were “illegitimate” and “illegal.”

Ecuador’s use of the dollar gives Correa no outlet for providing credit to the economy as access to foreign financing dries up and revenue from sales of oil tumbles. Crude, which has slid 70 percent from a July record, accounts for 60 percent of Ecuador’s exports.

‘Stricter’ Controls

Correa is likely to impose “stricter” controls on capital and imports to keep money from leaving the country, Bernal said.

Bulltick Securities recommended investors “stay away” from Ecuador’s bonds, including its 9.375 percent securities maturing in 2015, as prices may “fall much further.”

The yield on Ecuador’s 2015 bonds was unchanged at 30.68 percent, while its price held at 40.5 cents on the dollar, according to JPMorgan Chase & Co.

Last month, Ecuador decided to honor its 2015 securities after invoking a 30-day grace period. The government views that bond’s legality differently than that of its 2012 notes and 10 percent bond maturing in 2030, Finance Minister Maria Elsa Viteri said in January. Ecuador’s 2012 and 2030 bonds are restructured securities from the country’s last default in 1999.

An audit commission created by Correa said in a 172-page report in November that Ecuador’s global bonds due in 2012 and 2030 “show serious signs of illegality,” including issuance without proper government authorization.