MercoPress. South Atlantic News Agency

Ecuador auditing sovereign bonds delays interest payments

Ecuadorian President Rafael Correa said Saturday that his government is invoking a 30-day grace period and has until December 15 to decide if it will make a 30.6 million USD interest payment on 2012 bonds due Saturday.

He was referring to an announcement made Friday by Finance Minister Maria Viteri, who had said Ecuador would delay the interest payment while it reviews an audit of its Global 2012 bonds worth 1.25 billion USD. That audit is due to be released on Thursday. President Correa said in a radio address Saturday that he learned in a preliminary report on the audit that "terrible" things have been found with respect to the management and renegotiation of the country's foreign debt by previous governments. The president said the delay does not signal an eventual default because the contract stipulates the possibility of a one-month grace period. "We'll take until December 15 to decide if we'll keep paying or if we'll fight a legal battle, because those debt renegotiations were a veritable robbery for the country" said the US educated economist. "We're not playing around. If there is a sufficient basis for us to say: 'we can't pay this debt because it's illegitimate' that's what we'll do. Let the bond (prices) fall, let the country risk go up ... that doesn't interest us at all, that doesn't concern us at all," Correa said. The populist president said while running for president in 2006 that he would default on "illegitimate" debt and instead use the money fight poverty. Although Ecuador has enough foreign reserves to make the debt payment, the national budget has been squeezed by a recent, sharp decline in the price of oil, the country's main source of foreign currency. In response to Ecuador's announcement, Standard & Poor's and Moody's on Friday lowered Ecuador's credit ratings. "The three notch downgrade reflects the severe uncertainty regarding the government's willingness and likelihood to pay during the grace period," the ratings agency explained. "If the government signals its intention to pursue a restructuring of its debt with bondholders during this period, we likely will lower the ratings to 'SD,' indicating selective default." The delayed payment essentially cuts Ecuador off from international credit lines and will scare off already limited foreign interest in the country's oil and mining sectors, said Enrique Alvarez, head of research for Latin American financial markets at IDEA global in New York. The 2012 bonds are trading at 20 cents on the dollar, as low as if Ecuador had defaulted. To access international credit, the government would have to pay "38 percent above current US Treasury rates on average, a prohibitive amount," Alvarez said. Ecuador's Global 2012 bonds require twice-yearly 12 percent interest payments of 30.6 million USD. The country's total foreign debt is roughly 13.1 billion USD equal to nearly 27% of Ecuador's Gross Domestic Product.