(Repeats to additional subscribers)
QUITO Dec 12 Ecuador declared default on its
2012 global bonds on Friday over charges the debt was illegally
contracted by past governments, leaving investors to deal with
its second debt default in less than a decade.
President Rafael Correa's decision to not pay a $31 million
coupon on the government's 2012 bonds means the country's two
other global bond issues due in 2015 and 2030 are also
considered in default, according to cross-default clauses in
Here are some of the possible scenarios that Ecuador could
face after its default:
LAWSUITS AND ATTACHMENT OF ECUADOREAN ASSETS:
Many bond-holders will quickly file lawsuits to seize
Ecuadorean assets or freeze bank accounts held abroad for
Angry bondholders, who know Ecuador has enough money to
make the payments, would tackle the government's U.S. dollar
reserves held abroad and oil exports, which could deplete a key
source of revenue.
Ecuador has said it is prepared for any legal action in
case of a default, but analysts say bond-holders could still
inflict much damage to the country's economy via attachments.
Argentina is still fighting suits filed by bondholders who
didn't agree to the government's restructuring of its debt
after it defaulted in 2002. In October, a judge froze Argentine
private pension fund investments in the United States based on
a request by bondholders seeking payment.
DEFAULTED BONDS RENEGOTIATION:
Ecuador could follow up with a tough renegotiation of the
defaulted global bonds, demanding a hefty "haircut" or
reduction of the original value of the three bonds that are
worth around $3.8 billion in total.
Analysts say President Correa's main goal since he started
threatening nonpayment was to restructure the global bonds to
lower their value and extend maturities. The socialist is known
as a tough negotiator, meaning talks could take years.
Still, many bondholders could reject a final restructuring
offer and rely on the courts to ensure payment.
DROP IN FOREIGN AND DOMESTIC INVESTMENT:
Ecuador's private sector will struggle to gain access to
international credit already scarce due to the spreading global
crisis. Many major companies in manufacturing, agriculture and
services could move to neighboring Peru and Colombia to get
better access to loans and expand their businesses.
Foreign mining companies could struggle to jump-start major
projects in Ecuador as investors's mistrust of the government
will hurt financing. Oil companies will also refrain from major
investment, analysts say.
Less foreign and domestic investment will further hurt an
economy that has already seen its revenues cut due to a
free-fall in oil prices. A souring economy could trigger
political instability in a country where the last three
presidents were toppled by street and congressional turmoil.
LIMITED MULTILATERAL CREDIT:
Many multilateral lenders will limit credit to Ecuador,
which will increase its reliance on loans from friendly nations
like Venezuela already struggling with its own finances due
falling oil prices.
Correa had already complained that the Inter-American
Development Bank delayed the approval of loans to monitor the
government's default threats. Other multilateral such as the
World Bank will likely shut down credit to Ecuador, analysts
Less credit and lower oil prices will make it harder for
the government to finance its 2009 national budget, meaning it
would potentially cut social spending that has been key for
Correa to build a strong popular support base.
Ecuador will also struggle for years to issue new debt in
international markets, possibly until another government takes
(Reporting by Alonso Soto; Editing by James Dalgleish)