NEW YORK, March 26 Merrill Lynch on Monday
increased Ecuador allocations in its model portfolio from
market weight to overweight because of reduced risks of default
in the short term.
Merrill Lynch also said the increase in exposure to Ecuador
also allows accommodation of a cut in Venezuela allocations
from overweight to market weight.
"Investors continue to believe Ecuadorean bonds carry high
political risk, nearly three times as high as during the
Alfredo Palacio administration, which we consider somewhat
exaggerated -- following the recent declarations and actions by
the President Rafael Correa administration," the bank said in a
Ecuadorean bonds have undergone a period of extreme
volatility due to Correa's pledges to restructure the country's
external debt, which he considers illegitimate, too large and
expensive to service.
However, in the past two months, the Correa administration
has been moving away from default statements and has allocated
in the budget the full amount needed to service external debt.
Correa has paid, on time, the coupon of the Ecuador bond
due in 2030, said that Ecuador would not seek debt forgiveness
from multilateral lenders, and indicated the Argentine model
may not be the one to follow, despite stating the contrary
during his campaign, the note said.
Merrill also cut Venezuela allocations as a result of the
upcoming issuance of $5 billion in three classes of bonds by
Petroleos de Venezuela S.A. (PDVSA).
"While not perfect substitutes to the sovereign bonds, we
believe this new issuance will affect the sovereign curve, as
buyers of PDVSA bonds will likely try to raise actual dollars
by selling some of these to the Street," the bank said.
It added that the PDVSA debt will compete with other
sovereign debt assets as PDVSA has increasingly merged with the
rest of the government.
"The technical picture could be negatively impacted by the
massive supply of PDVSA paper announced, which implies a 30
percent increase of the outstanding Venezuelan bonded debt in
dollars. Therefore, we cut Venezuela from Overweight to Market