Ecuador decides to stiff creditors

Washington Post:

Ecuador's President Rafael Correa said yesterday that his nation is defaulting on its foreign debt, fulfilling his longtime populist pledge to leave international creditors in the lurch.

The default, Ecuador's second in 10 years, could rattle already jittery investors who have pulled billions of dollars out of emerging markets in recent months as the global financial crisis has spread. It could also set back U.S. interests in Latin America, as Correa now seeks to deepen financial ties with allies like Iran, which this week granted the South American nation a new $40 million credit line.

Yet some analysts say the impact of Ecuador's default may be relatively contained.

They note the size of Ecuador's $3.9 billion worth of global bonds -- though four times larger than those held by the Seychelles, the only other country to default this year -- is still relatively small. By comparison, Argentina in 2002 defaulted on a whopping $100 billion in foreign debt.

And while developing world economies have taken a sharp turn for the worse in recent months, Ecuador is ceasing payments not because the oil-rich country cannot afford to pay but because it has made a political decision not to.

Correa has been threatening default and demonizing foreign investors since his presidential campaign in 2006. Most recently, he has cited a presidential commission report that found evidence of criminal violations by previous governments that sold debt to pension funds, hedge funds and other overseas investors.

Last month, Correa, an economist with a degree from the University of Illinois, said Ecuador would hold off on a $31 million interest payment, triggering a 30-day grace period that runs out Monday. He had hinted since then that Ecuador might make the payment. But speaking to reporters in the commercial center of Guayaquil yesterday, Correa said it would not be made and declared the country in default.

"We are ready to accept the consequences," Correa said, according to a transcript of his comments. He described the debt as "immoral," saying the government would take its findings that past debt sales were tainted by graft and bribes to international courts.

Ecuadorian officials have been making their case in capitals across the hemisphere this week, including during a visit by Correa's top cabinet members to Washington and New York. But that may not prevent investors, who Correa said would receive a restructuring proposal in coming days, from suing Ecuador and possibly seeking the attachment of foreign assets.

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On Thursday, the Quito-based newspaper El Comercio reported that the government had quietly bought back $680 million in debt from foreign creditors in recent weeks. It has raised the possibility that Ecuador may have purposely been trying to drive down the value of its bonds on international markets, allowing the government to step in and buy them back for a fraction of the cost of honoring them and making a renegotiation of the debt easier now.

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That would be a pretty immoral business practice. There is nothing wrong with buying back debt at the current market price, but it would be a fraudulent business practice to deliberately drive down the market price. Investors in the US would probably be in a position to sue Ecuador under our own securities laws. The officials seem to be admitting to the scam, since they are clear in stating that the have the money to pay.

This mess will also hamper Ecuador going forward. Who would be willing to invest in the country now?