The people of Ecuador are rising up to refound their country as a pluri-national homeland for all. This inspiring movement, with Ecuador's indigenous peoples at its heart, is part of the revolution spreading across the Americas, laying the groundwork for a new, fairer, world. Ecuador Rising aims to bring news and analysis of events unfolding in Ecuador to english speakers.

Wednesday, May 27, 2009

Ecuador Pays 35 Cents for Defaulted Bonds in Buyback

By Stephan Kueffner

May 26 (Bloomberg) -- Ecuador paid 35 cents on the dollar to holders of as much as $3.2 billion of defaulted bonds and gave creditors a second chance to sell back their securities.

The payout is 5 cents more than the minimum price set by the government and the 30-cent payout offered by Argentina in its 2005 debt restructuring. Ecuador didn’t say how many investors participated in the buyback.

The government, seeking to pressure bondholders into participating, said it won’t improve the offer to those creditors who hold out of the buyback auctions. President Rafael Correa halted 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.” A drop in oil exports has sparked a tumble in Ecuador’s reserves.

The repurchase prices “reflect the resources of the republic and are responsive to the majority of the offers received,” Finance Minister Maria Elsa Viteri said in a statement. “The republic will not offer equal or more favourable terms to those being offered to holders of bonds presently.”

Ecuador’s stance is similar to that of Argentina after its 2005 debt settlement. Creditors holding $20 billion of the bonds Argentina defaulted on in 2001 rejected the government’s offer of about 30 cents on the dollar. Then-President Nestor Kirchner pushed legislation through congress that blocks the government from making a second offer to creditors.

“Ecuador will take a hard line in terms of holdouts,” said Igor Arsenin, an emerging-market strategist at Credit Suisse Group in New York.

Bond Prices

The 2012 and 2030 securities rose 2 cents to 33 cents, according to JPMorgan Chase & Co. The bonds, which were sold as part of Ecuador’s 2000 restructuring after its default in 1999, should be trading at the 35-cent clearing price until the auction is completed, said Siobhan Morden, a Latin America debt strategist at RBS Securities Inc. in Greenwich, Connecticut.

The current level may reflect a “blended price” that also takes into account the potential decline in the bonds’ value after the auction is finished, Morden said.

Bond prices may also indicate that investors are unclear about whether bondholders who didn’t submit a bid initially will be allowed to participate in the auction now , said Alberto Bernal, a fixed-income strategist at Bulltick Capital Markets in Miami.

Viteri is scheduled to hold a press conference May 28, Finance Ministry spokesman Victor Carvajal said. The government won’t release further details until that time, he said. Viteri said on May 18 that more than 75 percent of bondholders had participated in the auction.

Default Threats

The government will provide information by June 12 on the amount repurchased at the conclusion of the second buyback offer, Viteri said in the statement.

The completion of the buyback will cap more than two years of default threats by Correa, a 46-year-old economist who earned his PhD at the University of Illinois at Urbana-Champaign. In December 2006, a month after winning a landslide victory, he said he wouldn’t “hesitate” to default on the country’s debt in order to maintain government spending on the poor.

Werner Baer, an economics professor who taught Correa at the University of Illinois at Urbana-Champaign, said his former student is not a “radical.”

“You have to look into really the circumstances, not just cry default without understanding the motivation,” Baer said. “I think he’s been unfairly caricatured as a leftist radical president. Correa was always interested in the poor, in the distribution of income. You don’t have to take an ideological side to see that traditionally income has been very concentrated in most Latin American countries and he was concerned with that.”

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