Ecuadorian president Rafael Correa has made good on his 2006 presidential campaign promise to default on any foreign debt deemed illegitimate, defaulting on $3.9 billion in global bonds. This marks Ecuador's seventh default since gaining independence in 1830, with the most recent taking place just a decade ago.
A Public Credit Audit Commission completed a year-long audit of debt contracted between 1976 and 2006 and determined that much of it was issued without proper government authorization and involved usurious interest rates. In a 172-page report, the commission called on Correa to halt payments on outstanding debt and bring to justice those involved in managing a 2000 global bond issue. That could include bankers at Salomon Smith Barney, now part of Citi, and at J.P. Morgan.
Correa is reportedly putting together a restructure offer, with investors likely to get a haircut even larger than the 70% offered by Argentina in its $100 billion workout.
Investors became leery of the administration's intentions when it invoked a 30-day grace period in November to decide whether or not to make a $30 million debt payment falling due. The move led ratings agency Standard & Poor's to slash Ecuador's sovereign rating from B- to "selective default" (SD). Moody's also cut it from B3 to Caal."The combination of sharply lower oil prices and an expected hit to economic growth resulting from lower exports and remittances is expected to pressure fiscal accounts in 2009," S&P analyst Lisa Schineller says. "However, willingness, not capacity, to pay is currently the overwhelming credit weakness."
The government in Quito says it has some $8.8 billion in reserves, and its $10.3 billion debt gives it a comfortable debt-to-GDP ratio of 25%. Correa may be trying to gain political capital at home, as dropping oil prices threaten social spending. Oil accounts for 60% of Ecuadorian exports and nearly 40% of the nation's budget. With rumors of $680 million in Ecuador debt buybacks in recent weeks, some analysts also speculate that Correas default is aimed at pushing down debt prices for further purchases.
- Antonio Guerrero
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Source: Global Finance
