Ecuador Plays Bond ‘Market for Fools,’ Aberdeen Says

By Lester Pimentel

June 16 (Bloomberg) -- Ecuador President Rafael Correa “played the market for fools” by defaulting on $3.2 billion of debt six months ago and then repurchasing the bonds at less than 40 cents on the dollar, Aberdeen Asset Management Plc said.

The government’s bonds due in 2015, the only of three global notes Correa kept servicing, rose to an eight-month high today, a day after Standard & Poor’s raised the country’s rating to CCC+, two levels higher than when he defaulted in December. Ecuador has bought back 91 percent of the defaulted bonds due in 2012 and 2030, Finance Minister Maria Elsa Viteri said June 11.

“Ecuador won,” Edwin Gutierrez, who manages $5 billion at Aberdeen and sold his Ecuador holdings before the default, said in a telephone interview from London. Correa’s government “played the market for fools. Remind me never to play poker with that guy,” he said.

Correa, a 46-year-old economist who counts Venezuelan President Hugo Chavez as one of his closest allies, halted payments on the bonds because he said they were issued illegally. He called the bondholders “true monsters who won’t hesitate to crush the country” when he announced the default on Dec. 12 and said in a national radio address the next day that he wanted to force them to accept a “big discount.”

S&P may raise Ecuador’s rating again if the government “can weather the next few months,” Richard Francis, a New York-based analyst at the company, said in a telephone interview yesterday.

‘Ridiculous Ideology’

The 9.375 percent bonds due in 2015 jumped to 70.25 cents today from 17 cents in December, according to JPMorgan Chase & Co. The yield on the bonds, which Correa says he will keep honoring, fell to 17.15 percent from 62 percent. Ecuador’s dollar bonds have returned 61 percent this year, more than all other securities in JPMorgan’s EMBI+ index except for Ukrainian debt.

“The exchange has been such a success for Ecuador,” said Igor Arsenin, an emerging-market strategist at Credit Suisse Group in New York. “It is surprising how far” the bonds have rallied, he said.

Last year’s default was triggered by the combination of declining oil prices and Correa’s “ridiculous ideology,” Claudio Loser, the former director of the International Monetary Fund’s Western Hemisphere department, said in a December interview. Oil, the South American country’s largest export, sank to a four-year low of $32.40 a barrel in December before rebounding this year. Oil traded at $72.11 as of 11 a.m. in New York.

‘Mistake’

The default, while reducing Ecuador’s debt load, was still a “mistake” because Correa won’t be able to sell bonds in foreign markets for the “foreseeable future,” Arsenin said.

The government’s ability to ward off an investor demand to accelerate payments on the 2030 bonds helped it repurchase most of the benchmark securities at a discount, said Gutierrez at Aberdeen, Scotland’s biggest independent money manager.

Correa pulled that off by buying back about 50 percent of the 2012 and 2030 bonds in the secondary market before holding the repurchase auction in May, according to Siobhan Morden, a Latin America debt strategist at RBS Securities Inc. in New York. Those purchases prevented bondholders from reaching the 25 percent threshold needed to demand immediate principal payment on the 2030 bonds, she said.

Debt Reduction

Unable to seek an acceleration of payments, many investors opted to take the 35 cents on the dollar that Ecuador offered in the auction, Gutierrez said. Hamilton, Bermuda-based Lazard Ltd. advised the government on the buyback.

Viteri didn’t rule out that the government may have bought bonds prior to the auction, saying in a May 12 statement to creditors that the country “has the right to purchase or acquire bonds in any manner.” The bonds due in 2012 and 2030 sank to as low as 20 cents on the dollar ahead of the default.

“He took advantage of the prices,” Gutierrez said. Correa “played it very intelligently,” he said.

Ecuador’s foreign debt equals about 17 percent of gross domestic product after the buyback, S&P said. Neighboring Peru, which has an investment-grade rating of BBB- from S&P, had a foreign debt that equaled 24 percent of GDP as of January, according to the central bank. Ecuador’s CCC+ rating is seven levels below investment grade and in line with Ukraine’s.

‘Greed Always Prevails’

The reduction in principal buoyed Ecuador’s “near-term ability to pay,” helping spark the rally in the bonds due in 2015, Morden said.

The default was Ecuador’s second in the past decade and seventh in its 179-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 IMF. In 1999, Ecuador halted payments on $6.5 billion of bonds that had been restructured just five years earlier.

“They defaulted in 1999 and then we all bought the bonds,” Gutierrez said. “The market forgets. Greed always prevails.”