LESTER PIMENTEL/ DANIEL CANCEL
November 17, 2008
Ecuador President Rafael Correa's looming default on $510 million of bonds may hurt his biggest ally, Venezuela President Hugo Chavez, more than anyone else.
Ecuador, hamstrung by a tumble in oil, its biggest export, said last week it will use a 30-day grace period to decide whether to make a $30 million interest payment that came due Nov. 15. Chavez's government owns structured notes tied to Ecuador's bonds that would force Venezuela to pay $400 million if Correa doesn't make the payment, according to estimates by Barclays Capital Inc.
Venezuela's potential losses may strain relations between two presidents who meet every three months and espouse the same socialist themes. During an Ecuador-Colombia border dispute in March, Chavez, 54, mobilized tank battalions in a show of support for Correa, 45.
``Chavez will have something to say'' about the debt payment, said Alejandro Grisanti, a fixed-income analyst at Barclays in New York. He ``will encourage Correa not to default.''
Grisanti said he revised his estimate to $400 million from an initial $800 million after meeting with Finance Ministry officials today. Venezuela has pared its holdings of the notes over the past year, he said. A spokesman at the Venezuelan Finance Ministry declined to comment on the government's holdings of the notes.
The price on Ecuador's 12 percent bonds maturing in 2012 plunged to 14 cents on the dollar on Nov. 14, sending yields over 100 percent, as investors braced for the first sovereign default since the global financial crisis deepened in September. The bonds rebounded today to 24 cents at 6 p.m., according to JPMorgan Chase & Co.
Standard & Poor's cut Ecuador's rating to CCC-, three levels above default, on Nov. 14, hours after Finance Minister Maria Elsa Viteri announced the government's plan to withhold the interest payment. Fitch Ratings put Ecuador's issuer default rating of CCC on ``negative'' watch today, saying there was a ``reasonable probability of near term downgrades.''
Correa, an economist who earned his Ph.D. at the University of Illinois at Urbana-Champaign, has been threatening since the 2006 campaign to halt payments on debt he calls ``illegitimate.''
In his weekly radio address on Nov. 15, Correa called a debt auditing committee's preliminary report ``truly horrifying,'' echoing previous statements he's made that some of the obligations were fraudulent. He said he expects to receive a full report on the debt on Nov. 20.
``If there's a sufficient basis to say we can't pay this illegitimate debt, that's what we'll do,'' Correa said in his radio address, according to a statement posted on the government's Web site. ``That the bonds fall and the country risk rises doesn't hold the least interest for us. Here we'll act for the country and the common good.''
Ecuador's finances have come under strain as oil, which accounts for 60 percent of the country's exports, has plunged 62 percent from a record high in July to $55.59 a barrel.
Ecuador needs an oil price of $95 to cover all the spending in its budget and a price of $76 to avoid depleting its $6.3 billion of foreign reserves, according to Barclays. The South American country last defaulted less than a decade ago, halting payments on $6.5 billion of bonds in 1999.
Argentine Default Concern
The structured notes, so-called first-to-default baskets that are also tied to Argentine and Venezuelan debt, work like credit-default swaps, Grisanti said. Swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should an issuer fail to adhere to its debt agreements.