Ecuador’s announcement last Friday (December 12) that its 2012 bonds were ‘illegitimate’, effectively defaulting on them, had little impact on Latin America’s fixed income markets this week. The announcement to default on a $30.6m coupon on its 2012 $520m bonds threw its $3.8bn of debt commitments into doubt.
The government refused to meet the coupon payment on Monday (December 15) despite the country’s $6bn of external reserves and modest debt to GDP ratio of around 25%. By contrast, Argentina’s debt to GDP ratio stood at 150% when it defaulted in 2001. As a result, analysts say ideological dogma and populism motivated the default.
The 2012 bonds carry a 12% coupon and have been branded ‘illegitimate’ by the country’s debt audit commission. It is not clear if the country’s $650m 2015 and $2.7bn 2030 bonds will be serviced after the government indicated the global notes would be restructured.
The move took markets by surprise since the government had repurchased around $700m of debt in recent weeks. Market players are predicting the price of any eventual restructuring on the 2012 bond to be around 20 cents on the dollar — no net upside from its current distressed trading levels with an aggressive reduction in the principals for its 2015 and 2030 bonds.
Standard & Poor’s subsequently placed the sovereign on selective default from its CCC minus rating and Moody’s downgraded it to Ca from Caa1.
Stephen Rothwell, executive director at London-based hedge fund Argo Capital said that markets were little affected because most investors had hedged their risk exposures to the credit. He said the country’s long-standing deviancy in the international bond market would not undermine the emerging markets brand or "broader investor risk appetite for Latin America".
Alberto Bernal, head of macroeconomic strategy at Miami-based Bulltick Capital Partners, said: "we do consider that there is some risk that accounts may short Argentina and Venezuela on the back of these news, but we doubt that any accounts will be forced to sell assets to make up for losses coming out of the Ecuador story." Although the country has set a precedent of Latin sovereign default rooted in political ideology rather than financial expediency, analysts say Venezuela is likely to continue debt servicing in 2009.
Analysts say the debt restructuring is a prelude to dedollarisation in Ecuador, which would provide the country with an independent monetary policy that would allow the government to pump the economy with its own money.