A small country which has adopted a major global currency finds itself with massive debts and insolvent banks. Its only real hope is that it controls areas rich in hydrocarbons; the problem is that it has neither the wealth nor the expertise to exploit those hydrocarbons on its own. The result: it ends up essentially selling itself to an omnivorous global superpower which is interested only in access to resources rather than in domestic economic growth and prosperity.
Back in June 2007, I looked at an intriguing idea coming out of Ecuador, whose massive Ishpingo-Tiputini-Tambococha oil fields lie underneath the most important area of biodiversity on planet Earth: Yasuni National Park. (Time’s Bryan Walsh has been there. It’s worth reading his report to get a feel for just what’s at stake here; suffice to say that it’s a place which makes even grammar sticklers want to use the term “most unique”.)
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.
EMTA, the erstwhile Emerging Market Traders Association, hosted an in-depth session today on the debt markets in developing countries, both sovereign and corporate. And it’s the corporate bonds which are by far the biggest worry: emerging-market corporate loans are now five times the size of the corporate bond market. And JP Morgan’s Joyce Chang came out with one of the scariest sets of datapoints I’ve come across in a while. Get this:
EMTA, formerly the Emerging Markets Traders Association, had an interesting panel on the Ecuador default today. It was a bit lopsided: no one on the debtor side — and EMTA invited the country’s own representatives, as well as its lawyers and bankers, and even the US Treasury — would agree to attend. As such, it was really a panel of private-sector participants, and felt much like a wake: it was clear that with the success of Ecuador’s exchange offer, the country has won and the private sector has lost.
Ecuador has closed out its bond exchange offer at the higher end of expectations, paying 35 cents on the dollar to investors who hold the 2012 and 2030 global bonds. That’s higher than the bonds have traded all year, and certainly higher than they have traded since Ecuador defaulted — which means that any vulture investors who bought the bonds in default will be able to lock in a decent profit for doing essentially no work at all.
According to Ecuador’s finance minister — and there’s no reason not to believe her — there’s been “excellent” take-up of her offer to buy back Ecuador’s 2012 and 2030 bonds at somewhere in the neighborhood of 30 cents on the dollar. As Reuters’s Maria Eugenia Tello notes,