Ecuador May Default on 2015 Bonds, Credit Suisse Says

By Drew Benson

May 27 (Bloomberg) -- Ecuador may halt payments on its $650 million of bonds due in 2015 as the government’s finances deteriorate and the “economic cost” of defaulting on other securities has been low, Credit Suisse Group AG said.

The government said yesterday it paid 35 cents on the dollar to holders of as much as $3.2 billion of its defaulted 2012 and 2030 bonds in a buyback auction. President Rafael Correa stopped payments in December on $510 million of 2012 bonds and in March on $2.7 billion of 2030 bonds, saying the securities were “illegitimate” and “illegal.”

Ecuador, which has been hit by a decline in oil exports, has continued to make interest payments on its 9.375 percent bonds maturing in 2015. The government views that bond’s legality differently than that of its 2012 and 2030 notes, Finance Minister Maria Elsa Viteri said in January. Ecuador’s foreign reserves have tumbled 30 percent since December amid the drop in oil prices. Crude is down 57 percent from a July record.

“The central government fiscal accounts still look very precarious,” New York-based analysts Diego Sasson and Alonso Cervera wrote in a report. “If the reputational and economic cost of the buyback of the defaulted debt has been low, why wouldn’t the government follow the same route with the 2015 bonds?”

Ecuador’s defaulted debt buyback offer will likely be accepted by more than 75 percent of bondholders, Credit Suisse said. Reaching that threshold would allow the government to alter the terms of the defaulted bonds, according to Sasson and Cervera.

‘Government’s Threat’

Investors are selling back their bonds in part because of the “government’s threat” to change the terms of the securities and because of the lack of success that holdout creditors have had in seizing assets from Argentina following its 2001 default, Sasson and Cervera wrote.

Creditors holding $20 billion of the bonds that Argentina defaulted on in 2001 rejected the government’s offer of about 30 cents on the dollar. The holdouts have yet to succeed in winning payment in court as the government has managed to shield its overseas assets from the lawsuits.