Ecuador’s back to its old tricks. Finance Minister Maria Elsa Viteri confirmed this week that her country won’t be meeting interest payments on its global bonds due to be redeemed in 2015. “We also declare ourselves in technical default.” The default is Ecuador’s seventh in its 178-year history, according to a study by former Argentine economic policy secretary Frederico Sturzenegger and ex-IMF assistant Jeromin Zettelmeyer.
Ecuador’s move “was ultimately motivated by the need to guarantee government funds in 2009 to finance [President Rafael] Correa’s ambitious expenditure programme”, says Capital Economics’ Luis Carlos Nino. 2008 public spending has grown at an annual average of 60% each quarter. But JP Morgan Asset Management’s Matias Silvani isn’t so sure. Ecuador’s last default in 1999 “was due to a solvency issue”. Yet with $5.3bn of foreign reserves, despite state revenues suffering from a 70% plunge in the price of oil, the government “does have the money. This is purely about willingness to pay”.
And as Ecuador may take the “better part of a decade” to regain access to international capital markets, says Prudential Financial’s David Bessey, “you must assume Correa’s going to continue to play hardball. It’s rare not to pay when you can.” That chimes with Correa saying he wants to force a “big discount” on creditors, whom he called “true monsters who won’t hesitate to crush the country”. The bonds, he added, “trampled on Ecuador’s national interests, dignity and sovereignty”.
Those sentiments won’t console investors who may now “be saddled with the biggest losses in a government bond restructuring since at least World War II”, says Bloomberg. Overall repayment is now expected to be “more punishing” than the 30 cents on the dollar that Argentina paid in a 2005 settlement, says Professor Arturo Porzecanski at the American University in Washington. “It’s practically the same obligation being discounted and forgiven again and again.” And there’s another equally alarming problem looming: who’s next?
Now “there are fears that Venezuela, Bolivia, and Argentina may be tempted to follow suit, setting off the sort of stampede seen across the region in the early 1930s”, says The Daily Telegraph’s Ambrose Evans Pritchard. This could lead “to contagion in other counties with left-leaning rulers and much bigger debts”.
Argentina, which is still wrangling with creditors following its 2001 default, is unable to access international capital markets as it fends off creditor lawsuits. The government has already seized control of its private-pension system, and has been accused of engineering a “soft default” on inflation-linked bonds by rigging price data.
Credit default swaps (CDS) – which show the market’s view on default risk – have been suggesting for two months that there’s a very high chance of Argentina halting payments. It must cover $20bn in interest and principal next year, but President Cristina Kirchner has earmarked just $8bn for debt costs in her financing programme. However, Venezuela’s catching up fast, with the likely default risk jumping 50% within the last month. “At some point, will Argentina and Venezuela ask: ‘well, Ecuador did it, why can’t we?’” asks Moody’s Alessandra Alecci.