Ecuador's finance minister suggests defaulting on bonds


Ecuador Bonds Tumble
Amid Talk of Default

By Lester Pimentel and Helen Murphy
Bloomberg News Service
Friday, December 22, 2006

Ecuador's bonds had their biggest-ever decline after the incoming finance minister said the government may restructure its $11 billion debt in a way similar to Argentina, which included a $95 billion default in 2001.

Ecuador's benchmark 10 percent bonds due 2030 tumbled after Ricardo Patino said yesterday president-elect Rafael Correa's administration will meet with bondholders next month to discuss a plan that "may be more like what happened in Argentina."

Correa, meeting yesterday in Caracas with Venezuelan President Hugo Chavez, said he "won't hesitate" to default on debt payments if he deems spending on social programs more important. Correa also has vowed to strengthen trade ties with countries such as Argentina and Brazil, governed by socialist politicians, rather than the U.S.

"Slowly the market is starting to realize that they mean what they say," said Alberto Ramos, a senior Latin America economist with Goldman Sachs Group Inc., of Ecuador's leadership. "This is an ideological view. This is about a willingness to pay."

The yield on the bonds surged 184 basis points to 13.32 percent at 1 p.m. in New York, according to JPMorgan Chase & Co. A basis point is 0.01 percentage point. The bond's price, which moves inversely to the yield, fell 11.75 cents on the dollar to 76.25 cents, its largest decline since the government issued the security in 2000.

The perceived risk of owning Ecuador's bonds surged today. Credit-default swaps based on $10 million of the nation's U.S. dollar-denominated bonds jumped 35 percent to $950,000 from $705,000 yesterday, according to data compiled by Credit Market Analysis in London. An increase in price indicates deterioration in the perception of credit quality; a decline suggests improvement.

Correa won a Nov. 26 presidential runoff election after advocating that his government cut ties with international lenders such as the World Bank and consider forfeiting or delaying what he called "corrupt and unfair" debt payments. Correa takes office on Jan. 15.

"If our moral duty to provide health, education and housing to our people impedes us from paying debt, we won't hesitate two seconds," Correa said at a news conference with Venezuela's Chavez. "We don't rule out a unilateral moratorium on our external debt."

Argentina's default was the biggest in history by a sovereign government. Last year the country completed restructuring $104 billion of bonds. Neighboring Uruguay exchanged $4.9 billion of its debt for longer-term, lower-interest securities in 2003, a move that Standard & Poor's also classified a default.

Under Argentina's 2005 debt restructuring plan, the government offered to compensate bondholders with new debt worth about 27 percent of their initial holdings, about half the recovery rate typically offered in government restructurings.

Patino said Ecuador will talk to all creditors, including bondholders and multilateral agencies, and may announce a restructuring in February.

Chavez said Venezuela, which bought $25 million of Ecuadorean bonds last year, may buy more of the country's debt. Argentina has raised about $4.5 billion by selling bonds to Venezuela since early 2005, helping it avoid turning to U.S. and European markets after its 2005 debt restructuring prompted several lawsuits from bondholders in international courts.

"We could support Ecuador just like we have supported Argentina," Chavez said during the news conference.

The average spread on Ecuador's dollar bonds today rose 159 basis points to 834 basis points or 8.34 percentage points, the highest since June 9, 2005, according to data compiled by JPMorgan.

Spread, or the amount of extra yield a bond offers over U.S. Treasuries, is a barometer of investors' confidence about being paid on time. Larger spreads mean investors are less confident and demand more extra yield to compensate them for the risk of default, relative to risk-free U.S. government debt.

In 1999, Ecuador defaulted on $6.5 billion of debt.

The 10 percent bond due 2030 is one of the two securities the government gave investors during a restructuring in 2000 of the defaulted securities.

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