Ecuador’s market manipulation: The WikiLeaks cable

By Felix Salmon
April 28, 2011
roubini.com, felixsalmon.com, and portfolio.com as well as reuters.com. So it's gratifying for me to see the subject come up in an official State Department cable, which has now been published by Ecuador's El Universo newspaper in conjunction -- of course -- with Wikileaks.

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I’ve posted on the subject of possible Ecuadorean bond-market manipulation in various places over the years, including roubini.com, felixsalmon.com, and portfolio.com as well as reuters.com. So it’s gratifying for me to see the subject come up in an official State Department cable, which has now been published by Ecuador’s El Universo newspaper in conjunction — of course — with WikiLeaks.

Here’s the relevant bit of the cable, was sent in June 2009 by US ambassador Heather Hodges, who has already been expelled from the country in the wake of the release of a different cable.

Market Manipulation?

——————–

3. (SBU) The repurchase of $2.9 billion worth of 2012 and 2030 bonds at a price of 35 cents on the dollar would represent a disbursement of about $1 billion. However, according to official figures, government reserves showed a drop of only $243 million between May 22 and May 29, the time the bond repurchase went through. This amount is much less than would be needed to repurchase the bonds, and lends credence to the widely held belief that the GOE repurchased some of the bonds previously in December 2008, following its report that the debt was illegitimate. An earlier purchase could have given the GOE an advantage by possibly reducing the number of remaining bondholders and their influence. Contacts from the Central Bank confirmed privately that the amount disbursed for the bond repurchase on May 29 was only $305 million.

SBU, here, stands for “sensitive but unclassified”; GOE is government of Ecuador. And the background, here, is the widespread belief that after Ecuador announced its bond default in December 2008, the government used Banco del Pacifico, a large Ecuadorean bank, to start buying bonds at levels above 20 cents on the dollar. That was just high enough that vulture investors didn’t want to amass a large position, but also low enough that buying bonds at 20 cents in the secondary market was a much smarter move than buying them back at 35 cents in the official restructuring.

There’s nothing particularly surprising here — the government’s intervention through Banco del Pacifico has been something of an open secret for a while. But it’s still startling to see it explicitly called “market manipulation” in a State Department cable. And it’s good to see State keeping an eye on such matters, which normally fall more under the purview of Treasury. A government which pulls dubiously-legal stunts like this is not one which can be trusted in diplomatic matters, so it’s good to see State paying attention. Not that they really needed to be told that the Ecuadorean government was prone to shenanigans.

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