Ecuador repays debt and makes history

Full repayment of 2015 bond is landmark on road to recovery from status of serial defaulter
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Rafael Correa, Ecuador’s leftist president, said his country has repaid a foreign loan for the first time since the oil-rich Andean nation first missed a payment 183 years ago, to ameliorate its reputation as a serial defaulter.

“We have just submitted $650m for the total payment of the 2015 bonds. The first time in history,” the fiery Mr Correa announced on Twitter late on Monday night, despite having ranted against bondholders in the recent past, adding “this in a year when we have received zero in oil revenues”.

Historians say Ecuador first defaulted in 1832, a decade after independence. After missing payments six other times, Mr Correa added an eighth default in December 2008, arguing that the country’s foreign debt was “illegitimate” and its bondholders “real monsters”.
Ecuador then voluntarily missed payments on $3.2bn of foreign bonds and six months later bought most of the debt back at 35 cents on the dollar.

At the time, oil prices were as high as Mr Correa’s popularity. Now, because of a combination of crashing oil prices and a stronger US dollar, Ecuador’s adopted currency, the IMF forecasts the country’s economy will shrink 0.6 per cent this year — South America’s third-worst performer, after Venezuela and Brazil.

The latest move by Mr Correa to honour its debt could be an attempt to restore investor confidence. “It’s good that Ecuador honoured, for the first time in its history, the payment of its bonds,” said Santiago Mosquera, head of research at the Quito-based brokerage Analytica Investments.

He warns, though, that the move will not necessarily translate into rates similar to those Ecuador scored last year, when it sold $2bn of 10-year bonds at a 7.95 per cent yield. It tapped the market again in May, selling $750m of bonds due in 2020 at an 8.5 per cent yield, adding to an issue launched in March at 10.5 per cent.

Yields on the 2020 bonds were at 16.64 per cent on Tuesday, after having traded as high as 19.8 per cent in October.

Some fund managers believe Ecuador’s debt issue last year happened at the peak of the emerging markets debt boom, amid immense appetite for even the riskiest securities.
“So they’ve finally repaid a bond,” said Paul McNamara, head of emerging markets at GAM in London. “In the 20 odd years I’ve been doing this they are the only country that haven’t paid a bond they could have paid, and that stigma is still there.”

Moreover, in August, Standard & Poor’s cut Ecuador’s credit rating one notch to B, five levels below investment grade. With oil prices in the doldrums, the price of any new bond issuance may be prohibitive.

Hernán Yellati of BancTrust argues this latest payment may help. “It is a good sign in order to try to reduce financing costs, have access to international markets, and lower their country risk levels,” he said.

Easing investor’s concerns, Mr Yellati also believes that “despite the recession Ecuador will be able to face debt payments through several mechanisms”. That includes China, which has been the country’s main lender since 2009. Beijing is owed $5.4bn by Quito, according to finance ministry data.

Alberto Acosta-Burneo, an economist with Grupo Spurrier in Guayaquil, estimates that Ecuador still has financing needs of about $3bn this year. But, aside from this week’s bond payment, officials in Quito recently announced Ecuador would soon receive another $2.8bn from Beijing between now and February 2016.

Mr McNamara warns that tapping international markets will remain challenging and expensive. “They’re an oil credit in a world where no one likes oil any more,” he said. “The stigma of a voluntary default will take some time to fade.”

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