Ecuador’s chutzpah-filled exchange offer

By Felix Salmon
April 22, 2009

Here are the official details of Ecuador’s exchange offer — the one where it’s attempting to buy back its own debt at 30 cents on the dollar.

The 108-page document kicks off with a letter from the finance minister, Maria Elsa Viteri Acaiturri, where she talks about “alarming… indications of illegality and illegitimacy” in the process which led to the issuance of the 2012 and 2030 bonds which Ecuador has defaulted on. She then however continues:

The Invitation is designed to assist in allowing both the 2012 and 2030 Bondholders and the Republic to close, on an acceptable basis, a very challenging period in Ecuador’s external debt history.

We appreciate your understanding and consideration and we look forward to restoring normal relations with the national and international investor community.

I think she’s serious, and honestly believes that buy unilaterally and unnecessarily defaulting on some (but not all) of its bonds, then buying those bonds back at about 30 cents on the dollar, Ecuador might be able to achieve “normal relations with the national and international investor community”.

Viteri doesn’t make threats in her letter — those come later in the document, on page 13 of the document (page 19 of the PDF):

Bonds acquired by the Republic (or a person nominated by the Republic) pursuant to the Invitation may be held by the Republic or the nominee. If a nomination is made, it is the Republic’s intention that the nominee will acquire all rights, including, if the Republic does not control the nominee, rights in respect of voting currently exercisable by Holders or beneficial owners of the Bonds that are accepted pursuant to the Invitation. The Republic will then consider a range of amendments to the Bonds, which it will propose to Holders after the Settlement Date. Certain amendments to the Bonds may be made by the Republic and Holders of a simple majority by value of the Bonds.

In English, Ecuador is saying that after this tender offer is over, it’s going to control a majority of the bonds — and that it will happily strip away from the bonds a large swathe bondholder protections embedded in the bonds at that point in time.

I’m not sure how much of a threat this really is: Ecuador tried a very similar tactic in 2000, with its notorious “exit consents”, and when it issued the new 2012 and 2030 bonds as part of that transaction, it limited itself as to the protections which could be stripped in such a manner. But still, I’m sure that Ecuador could cause no little mischief this way — especially considering that it has almost certainly bought up a large number of the bonds already.

My favorite bit of the document comes later, however:

The Constitution defines its goals in terms of multiculturalism, pacifism and relations with our neighbours, including… achieving Sumak Kawsay, a life in harmony with nature.

Is this the first time that principles of harmony with nature have been literally embedded in a sovereign debt exchange offer? And what do such principles mean for bond valuations? Perhaps we’re about to find out.

Eventually, the document gets around to explaining why Ecuador’s debt load is so burdensome that it’s being forced into this offer:

The Republic’s economy is estimated to have grown at a rate of 5.3%, in real terms, in 2008. The balance of the foreign debt was U.S.$10.0 billion, which was approximately 19.2% of GDP. As of December 31, 2008, the freely disposable reserves amounted to U.S.$4.4 billion.

Remember here that the total amount of the bonds in question is no more than $4 billion; Ecuador is current on all of the rest of its debt, and claims to have no intention of restructuring any of it. Meanwhile, Ecuador grew by 5.3% last year — one of the best economic performances in the world; its total debt load has actually been shrinking of late; and its debt-to-GDP ratio is so low that it could easily be mistaken for a budget deficit in more profligate countries.

In other words, Ecuador has no economic rationale whatsoever for defaulting on this debt: it’s doing so because it can, basically. I suspect that bondholders will prove unimpressed, and will tender very few bonds into this exchange. If you’re still holding Ecuador bonds right now, you’re doing so because you don’t need the coupon income. Eventually (although not in this election) the current administration will be replaced with one which is friendlier to the market. Most of Ecuador’s bondholders can wait until then, or else try their luck in the Southern District of New York in the meantime.


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felix, while I agree that Ecuador has no need to default now, you actually don’t prove your point. Comparing the current stock of ext. debt to Ecuador’s reserves ignores Ecuador’s forward looking cash flows.

I would bet that a close analysis would find:

a) the coupon on the bonds is a significant drain on the budget, as Ecuador overspent when oil was high and now has to cut spending to reflect much lower oil prices.

b) given the lack of market access/ difficulties cutting its budget/ constraints associated with dollarization, Ecuador will be dipping into its reserves significantly over the next few years if oil follows the WEO trajectory.

c) Ecuador’s incentives to pay are influenced by the fact that it knows that even if it paid it wouldn’t get market access in the near term.

Ecuador strikes me as a classic example of what rogoff called debt intolerance; Ecuador inherited a lot of debt from the 70s/ ran up a lot of arrears from then on creating a large stock without ever actually borrowig much/ never reduced that debt to a level where there is a domestic political consensus to pay in its various restructurings.

then throw in the constraint of dollarization; it cannot devalue to increase the sucre value of its falling dollar revenues from oil, which leaves it with the unpleasant choice of cutting its dollar budget.

one problem with the 99 restructuring was that the coupon on the 2010s and 2030s was not linked to the price oil; there was always an open question whether Ecuador would be able to maintain the political will to pay if/ when oil fell. the fact that ecuador increased spending/ had a big real appreciation in the boom only increased the underlying problem –

this isn’t to say Ecuador is going about this right. It is to say that if a country knows it has to make cuts to pay the coupon on its bonds (or dip into its reserves) and faces a high probability that even it does so it won’t get market access/ be able to borrow/ could end up defaulting, its incentives change –

Posted by bws | Report as abusive

‘Sumak Kawsay!’ a good idea!


Posted by daniel | Report as abusive