Tuesday, September 12, 2006

Ecuadorean Presidential Candidate Creates Unease Over Debt

Source: Bloomberg, Ecuadorean Candidate Correa Says He Might Renegotiate Debt & Bonds Fall This Week Among Emerging Market Debt; Reuters, Ecuador's Correa Eyes Argentine-Style Debt Reform

Leftist presidential candidate and economist Rafeal Correa indicated on September 12 that as Ecuador’s President he would make the renegotiation of the country’s sovereign debt, or the debt guaranteed by the government, a top priority. Presently, Ecuador holds $11 billion in bonds, or a foreign debt worth approximately seven percent of its gross domestic product. Approximately $1 billion of those are set to mature within the year, meaning that the country will be responsible for repaying the principle of the bond and any outstanding interest.

Mr. Correa believes that the money spent servicing the debt would be better spent on social programs within Ecuador. In order to do this, however, Correa claims that existing debt must be restructured. According to Standard & Poor’s, an independent company that analyzes stocks and bonds, “[a]ny unilateral . . . or detrimental change in terms” of a bond constitutes a default. To the chagrin of many foreign investors, Correa refuses to reject a large-scale debt default, stating that “we cannot dismiss an Argentina solution.” In 2001, Argentina defaulted on $95 billion in loans, the biggest default in history.

Mr. Correa, who is currently third in the polls, is not the only presidential candidate to address the country’s debt while campaigning, however. On August 22, the center-left candidate León Roldós threatened to halt interest-rate payments on the government’s foreign debt if elected. Ecuador has a history of debt default. In 1996, the country defaulted on $6.5 billion. It is this past inability to meet financial obligations, coupled with the bold assertions of the candidates regarding the country’s present debt, which makes foreign investors extremely nervous.

What are the risks that Ecuador faces if it defaults on its debt, if any? Is a debt default worth the short-term benefits that could accrue to the country’s social programs because of the increased domestic spending?

1 comment:

erc said...

It is unlikely Ecuador could replicate Argentina's approach to its debt crisis of 2001. It simply would not have Argentina's bargaining power. Sure, it can threaten to cut off oil exports--which flow to the US. But that would be catastrophic for Ecuador. Oil constitutes about forty percent of Ecuador's export earnings and about one third of its national revenues. Closing down oil exports would surely increase the number of people living in poverty, which currently stands at about forty percent of the country's population. Debt forgiveness? Ecuador, a middle-income country, does not qualify for HIPC relief. Moreover, given the fungibility of resources, there's no guarantee that debt forgiveness would benefit the poor. Monitoring measures have always been problematic--e.g. Chad.