Sept. 21 (Bloomberg) -- Ecuador may spend as much as $600 million to trim older workers from government payrolls in an effort to reduce the size of the state workforce and increase efficiency, Labor Minister Richard Espinosa said.
Ecuador’s government plans to ask 10,000 workers aged 65 to 69 to voluntarily retire in exchange for a severance package that would be paid half in cash and half in 3- or 5-year bonds, Espinosa said yesterday in an interview in Quito. Workers 70 and older would be forced to retire and get an all-cash severance.
Espinosa’s comments reveal some details about how the government would pay the costs associated with the layoffs, which President Rafael Correa first proposed to lawmakers in July 2009. The bill is under debate, and Espinosa predicted the measure will become law by Oct. 10.
The law seeks “a much more efficient state with innovative professionals and new ideas,” Espinosa, a 38-year-old former marketing executive, said from his offices in central Quito. “We need to generate change in a much faster way than we are doing now.”
Paying retirees with bonds could hurt Ecuador’s credit rating by increasing government debt, said Ramiro Crespo, head of Quito-based brokerage Analytica Securities CA Casa de Valores.
“The state doesn’t have a lot of liquidity,” Crespo said in a telephone interview. “The worry is that they’ve talked about paying contractors with bonds, now they are doing it with retirees, who knows what could come tomorrow.”
Ecuador has a Caa3 long-term foreign currency credit rating from Moody’s Investors Service, eight levels below investment grade, while Standard and Poor’s rates the country’s debt B-, according to data compiled by Bloomberg. The government defaulted on $3.2 billion of debt in 2008.
The yield on Ecuador’s 9.375 percent bonds maturing in 2015 has risen 86 basis points, or 0.86 percentage point, this year to 11.86 percent, according to JPMorgan Chase & Co. The price has declined to 91 cents on the dollar.
Ecuador’s Urban and Housing Development Minister Walter Solis said in June that the government may begin paying public- works contractors with domestic bonds as a lack of financing limits its ability to pay in cash.