MercoPress. South Atlantic News Agency

Ecuador announces second bond interest payment default

President Rafael Correa

Ecuador announced it is defaulting on a second bond payment, interest on 650 million US dollars in Global 15 bonds due through 2015. The announcement comes three days after President Rafael Correa said the country would not make a similar 30.6 million USD payment on Global 12 bonds.

A presidential commission has recommended that Correa default on 3.9 billion USD of Ecuador's foreign debt, saying it is "illegitimate". Analysts say the defaults effectively cut Ecuador off from outside financing as it faces a major budget shortfall from falling oil prices. President Correa has long threatened a default on what he defines as "illegal" debt, basically to put more money into social spending. Analysts forecast the Ecuadorian government will likely propose a restructuring to bondholders which will include a significant principal haircut. Not surprisingly, the ratings agencies moved to classify Ecuador as in "technical" default and its bonds plunged on the news. Analysts also argue that the decision not to pay was made on "ideological" grounds, not because of an inability to pay. As of end October Ecuador international reserves were 6.27 billion USD vs. 3.8 billion in sovereign debt which is largely in Eurobond form with maturities in 2012, 2015, and 2030. There is also 4.3 billion USD in debt to the international financial institutions and 1.5 billion USD to the Paris Club and other bilateral creditors. However be it for "ideological" or "illegal" reasons Ecuador has generated a huge negative implication for the region which is identified as the "Financial Times" effect. That refers to the fact that whenever Latinamerica is on the front page of the FT, it is usually for negative reasons and this will reinforce the view to some that the region is inherently unstable and needs to be treated very carefully. Nevertheless international multilateral organizations and credit agencies agree that the region overall has much lower vulnerabilities than at other occasions. Counter cyclical fiscal policy, budget primary surplus and wider trading relationships are only some of the many improvements in the past ten years that contribute to stability.