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Ecuador pays bond interest after all, prompting talk of market manipulation

Section: Daily Dispatches

By Joanna Chung and Hal Weitzman
Financial Times, London
via Yahoo News
Thursday, February 15, 2007;_ylt=ApU...

Ecuador's bond market remained volatile on Thursday in the wake of the government's surprise decision to pay interest on its debt as scheduled -- only a few days after it said the payment would be delayed.

Bond prices rallied late Wednesday -- following the latest development -- but fell again on Thursday as some investors took the opportunity to cut their losses and leave the market.

The move was as unexpected in Ecuador as it had been on Wall Street. On Wednesday evening the economy ministry issued a statement saying that it had approved the payment once public sector salaries and welfare payments had gone through.

"The government indicated that it was not willing to let its relationship with bondbolders deteriorate too much," said Michael Discher, senior portfolio manager at Pimco, the US fixed income manager. "But the uncertainty is looming over the market and will remain high, and the market will remain very volatile."

Quito's guessing game with the markets over recent months, resulting in volatile movements in bond prices, was criticised in Ecuador on Thursday. Ramiro Crespo, of Analytica Securities, a Quito investment bank, said: "This was either about incompetence or market manipulation."

The recent sharp movements have produced winners as well as losers. As prices rise, bond yields fall and in afternoon trading yesterday, the bonds maturing in 2030 were yielding about 11.65 percent. They were yielding 11.50 percent Wednesday night, compared with 12.78 percent on Friday.

"People who bought bonds a few days ago have won out because the prices have moved up sharply," said Howard Wright, director of emerging markets at BGC, the brokerage. "Ultimately, people may look back on this and realise that the uncertainty created a real buying opportunity."

Gunter Heiland, vice-president of JPMorgan Asset Management in New York, said: "There has been a shift in sentiment in the last couple of days but all the market activity is predominantly from hedge funds and speculative accounts."

The most dramatic movements have been seen in the derivatives market. Instruments called credit default swaps, which represent a kind of insurance against non-payment of debt, have seen much sharper price swings.

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