ECUADOR DEFAULTS ON COMMERCIAL DEBT

C O N F I D E N T I A L QUITO 001146 SIPDIS E.O. 12958: DECL: 12/16/2018 TAGS: EFIN ECON PGOV EC SUBJECT: ECUADOR DEFAULTS ON COMMERCIAL DEBT REF: A. QUITO 1124 ¶B. QUITO 1121 ¶C. QUITO 1062 Classified By: Classified by Ambassador Heather M. Hodges. Reason: 1. 4 B and D. ¶1. (SBU) Summary. On December 12, President Correa announced that Ecuador would default on one of its commercial bond issuances, and that Ecuador would soon make a restructuring proposal. On December 15, Finance Minister Viteri announced that Ecuador would not make an on-time payment on a separate bond interest payment due that day and would enter into technical default. Ecuador currently has the capacity to pay, but argues that the debt is illegal and/or immoral. End summary. Default on a Commercial Bond -------------- ¶2. (U) On December 12, President Correa announced that Ecuador would default on one of its commercial bonds issuances known as the Global 2012. The $30.6 million interest payment on the Global 2012 had been due on November 17, but at the time the GOE exercised a 30-day grace period, which ended on December 15 (reftel c). In his December 12 statement, Correa announced that Ecuador would not be making payment on December 15, effectively entering into default on that issuance. ¶3. (U) In announcing the decision not to pay, Correa said that "not all debt is illegitimate, immoral, but a large proportion" is. Correa added that the government would shortly be presenting a debt restructuring plan, to avoid a "complicated and painful litigation." ¶4. (U) Correa did not explicitly address on December 12 what Ecuador would do on other debt issuances, including two other commercial bonds known as the Global 2012 and Global 2030. Technical Default on a Second Bond Issuance -------------- ¶5. (U) On December 15, Finance Minister Viteri announced that Ecuador would not make a $30.5 million interest payment on the Global 2015 bond, which was due that same day. She did not provide any explanation for the delay. In not making the payment, Ecuador entered into technical default, since it has a 30-day grace period to make the payment before entering into formal default. Claims of Illegalities -------------- ¶6. (SBU) A debt commission established by Correa issued a report on November 20 that was highly critical of the Global 2012 and its companion issuance, the Global 2030 (reftel b). Those bonds were issued in 2000 to replace bonds on which Ecuador had defaulted in 1999, the Brady Bonds and Eurobonds. The Brady Bonds, in turn, had been issued to replace commercial debt on which Ecuador had defaulted in the 1980s. The debt commission report asserted that there were a number of irregularities and illegitimacies with the issuance of the Global 2012s and 2030s, as well as the underlying debt that had been previously restructured. (Note: In both of the restructurings, Ecuador received a substantial discount from the face value of the defaulted debt, although those discounts were not acknowledged in the debt commission report.) ¶7. (U) The debt commission report made only passing references to the Global 2015 bond, which was issued in 2005 and was not directly linked to restructuring prior debt. Capacity to Pay -------------- ¶8. (C) Unlike Ecuador's defaults in the 1980s and in 1999, Ecuador currently has the capacity to pay its external debt. The sharp fall in international oil prices, if sustained, will generate significant fiscal and balance of payment pressure for the government in 2009 (reftel a). However, international reserves were $5.3 billion on December 12, sufficient for Ecuador to make the interest payments due at the end of 2008. Comment -------------- ¶9. (C) Correa had been critical of the government's external debt burden prior to taking office, but had until recently been paying the debt on a timely basis. That has changed, and Correa appears to have decided that Ecuador will default not only on the Global 2012, but also on the Global 2015 and Global 2030, although his government has not explicitly explained its intent with regard to the latter two issuances. ¶10. (C) Even with these multiple announcements that the Correa administration has made on debt, it is not clear to us what Correa expects to gain from this default. Part of it may be exercising his long-standing antipathy to international debt and the conditions under which it was acquired. Part of it may be that he either felt politically constrained by the debt report or that he feels he will gain political advantage for the upcoming April 2009 elections. Part of it may be that he feels that he can force international creditors to grant Ecuador more favorable terms, although we suspect international creditors will be reluctant to engage in a voluntary debt restructuring for a country that defaulted when it had the capacity to pay. Part of it may be that he expects that the upcoming fiscal and balance of payments pressure will eventually constrain Ecuador's ability to pay and he is defaulting now in anticipation; however, the possible new financing that Ecuador will forgo by defaulting on commercial debt could be more than what it will save in 2009 from defaulting. ¶11. (C) It is possible that elements of all these strands factored into Correa's decision. If the government's decision to default is motivated by a wide, loosely defined range of factors, that could complicate the government's efforts to define how it wants to move forward. Given the confused and inconsistent manner with which Ecuador has dealt with international oil companies who have invested in Ecuador, we would not be at all surprised to see a similar pattern as the Correa government attempts to engage with the international financial community. HODGES