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Bonds News

SCENARIOS-Possible scenarios after Ecuador debt default

(Repeats to additional subscribers)

QUITO, Dec 12 (Reuters) - 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 the contracts.

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 payment.

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 say.

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 office. (Reporting by Alonso Soto; Editing by James Dalgleish)

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