Ecuador vows partial bond buy-back

By Naomi Mapstone in Lima and David Oakley in London Published: January 16 2009 02:00 | Last updated: January 16 2009 02:00 Ecuador yesterday promised to pay investors some of their money back on defaulted bonds in a move closely watched by the market because of its implications for other Latin American and emerging countries. The buy-back offer is likely to involve a large so-called haircut of 70 per cent with the government expected to pay only 30 cents on the dollar. There was little reaction in the markets, although a decision earlier in the week by the government to service some of its debt has given support to its bond markets. Some analysts warn that Ecuador could have a similar effect as Iceland, which sent emerging market assets of other countries into a tailspin last year after its banking system broke down. Nick Chamie, head of emerging markets research at RBC Capital Markets, said: "Ecuador is a small economy, but it could be a big drag on the rest of the emerging world because of its decision to default on some of its bonds. "It is one of the axis of evil in Latin America - together with Venezuela and Argentina - because of its market unfriendly governments." On Tuesday, the government promised to service future payments of its 2015 bonds, but not for those maturing in 2012 and 2030. Analysts believe Ecuador is prepared to service the debt of the 2015 bond because Venezuela, the country's close political ally, has exposure to these securities. Last month, the country missed a deadline for a $30.6m interest payment on bonds due in 2012. The government said these bonds and those maturing in 2030 were illegitimate or illegal because of the way they were negotiated after the country defaulted in 2000. Its decision, described as bizarre by some analysts, to honour some bonds has also opened fresh grounds for legal appeals by investors holding the defaulted paper. Ramiro Crespo, a Quito-based analyst for investment bank Analytica Securities, said the discrepancy between the treatment of the bond issues raised concerns about clauses relating to cross default and pari passu , or equal payment for bondholders. Holders of the 2012 and 2030 bonds could seek to attach interest payments on the 2015 bonds, he said. A credit default swap auction this week set the value of the defaulted bonds at a final price of 32.375, which means sellers of credit protection on those bonds will have to pay 68.625 cents on the dollar to settle their credit derivatives contracts. Although Ecuador has the capacity to pay its foreign debt obligations, its foreign exchange reserves in the central bank dropped from $6bn to $4.5bn and the country will have limited access to financing to cover an expected deficit of $3bn-$4bn if oil prices fail to recover.