Correa Defaults on Ecuador Bonds, Seeks Restructuring
Dec. 12 (Bloomberg) — Ecuadorean President Rafael Correa halted payment on foreign bonds he calls “illegal” and “illegitimate,” putting the South American country in default for a second time in a decade.
The government won’t make a $30.6 million interest payment by Dec. 15, when a monthlong grace period expires, Correa told reporters in his office in Guayaquil. The $510 million bonds due in 2012 plunged to 23 cents on the dollar from 31 yesterday and 97.5 cents three months ago.
“I have given the order that interest payments not be made,” Correa said. “The country is in default.”
By defaulting, Correa, a close ally of Venezuelan President Hugo Chavez, fulfills a threat he has made since a 2006 presidential campaign that ended in a landslide victory. His decision comes as a deepening global economic slump throttles demand for oil, the country’s biggest export. Ecuador, which defaulted in 1999, owes about $10 billion to bondholders, multilateral lenders and other countries.
“I couldn’t allow the continued payment of a debt that by all measures is immoral and illegitimate,” Correa said. “It is now time to bring in justice and dignity.”
Correa, 45, said the government will present a restructuring proposal in coming days. “We want creditors to recoup part of their money,” he said.
“Ecuador is moving further into isolation,” said Vicente Albornoz, head of the Cordes research institute in Quito. “The hardliners in the government won.”
A debt commission Correa formed last year said in a 172- page report in November that the global bonds due in 2012 and 2030 “show serious signs of illegality,” including issuance without proper government authorization. Correa invoked the 30- day grace period on the interest payment last month, saying he wanted to analyze the commission’s findings.
“Ecuador is a serial defaulter,” said Arturo Porzecanski, an international finance professor at American University in Washington. “They defaulted in the 1980s, 1990s and this decade. A lot of other countries have had one or two defaults, but Ecuador tops them all.”
Correa, who holds a doctorate in economics from the University of Illinois at Urbana-Champaign, has said he will not sacrifice spending on health and education to pay the debt. Ecuador’s foreign obligations are equal to 21 percent of its $44 billion gross domestic product. Argentina’s debt, by comparison, was equivalent to 150 percent of its GDP when it defaulted in 2001, according to Goldman Sachs Group Inc.
Oil, which has plunged 67 percent since July amid the global financial crisis, accounts for about 60 percent of Ecuador’s exports. Finance Minister Maria Elsa Viteri said on Nov. 18 the country’s fiscal accounts remain “strong and healthy.” Ecuador had $5.65 billion in cash reserves as of Dec. 5, according to the central bank.
The default was triggered by the combination of the decline in oil with “a ridiculous ideology,” said Claudio Loser, the former director of the International Monetary fund’s Western Hemisphere department, who now is a scholar at the Inter- American Dialogue. “The financial need wasn’t so great that it was forced to declare a default,” Loser said.
The South American country has defaulted six times since it separated from Gran Colombia in 1830, according to “Debt Defaults and Lessons from a Decade of Crises,” a book published in 2007 by Federico Sturzenegger and Jeromin Zettelmeyer.
“It’s a final blow to external investors, and particularly any energy investors that may have retained interest or had future plans to attempt an investment in Ecuador,” said Enrique Alvarez, head of Latin America fixed-income research at IDEAglobal Inc. in New York.
To contact the reporter on this story: Stephan Kueffner in Quito at email@example.com
Last Updated: December 12, 2008 16:43 EST
By Stephan Kueffner