Ecuador defaults on its bonds (the 2nd time in 10 years)

[Zelhar]

(Adds comments from analysts)

   By Mercedes Alvaro
   Of DOW JONES NEWSWIRES
 

QUITO (Dow Jones)--Ecuador on Monday unveiled a long-awaited plan to restructure its sovereign debt, proposing a sharp haircut for bondholders of Global 2012 and 2030 bonds.

The administration of President Rafael Correa said it will offer a minimum of 30% to repurchase up to $3.2 billion of those global bonds, although some analysts say that the government may already have some of the bonds in hand after making unannounced secondary market purchases.

Debt analysts say that the proposal could lead to lawsuits from unhappy bondholders, especially as Ecuador is seen as having sufficient liquidity to pay service its debt.

Bids will be taken until May 15 and the results following a modified Dutch auction are expected on or about May 26.

"The minimum price the government is offering is fair and appropriate," Finance Minister Maria Elsa Viteri said at a press conference, adding that the floor price will be 29.5% plus 50 basis points of the face value.

Ecuador's debt returns tanked on the news as spreads ballooned. Ecuador's spread on JPMorgan's EMBIG was 99 basis points wider at 3536 basis points over similar U.S. Treasuries, with returns a negative 2.03.

Ecuador has three overseas bond issues outstanding: $510 million in bonds due 2012, which carry a 12% coupon; $2.7 billion of 10% bonds due 2030, and $650 million of 9.375% bonds due 2015, which the government continues to service.

The government first defaulted on its debt in December. It has since refused to pay the interest on its 2012 and 2030 bonds, contending those bonds are "illegal" and "illegitimate" after an audit commission created by the government found the bonds to be "illegal and illegitimate."

Former Finance Minister Fausto Ortiz estimated that more than the half of bondholders could accept the government proposal.

"This is an incomplete proposal because the country continues in default, but this is also better than a restructuring," Ortiz said.

Resolving the default is vital for the Correa government, which is looking around $1.5 billion in loans from multilateral lenders to cover a forecasted 2009 fiscal deficit.

"Clearly, the government needs a relatively high level of acceptance of its offer in order to unfreeze access to needed multilateral financing given the backdrop of lower oil revenues," Goldman Sachs' Alberto Ramos said in a report.

Ex-Finance Minister Mauricio Pozo said that "it is impossible to understand how the government will pay cash for the global bonds given its fiscal problems.

"We don't know from where the money will come," Pozo said.

Ecuador earlier defaulted on its foreign debt obligations in 1999. In August 2000, it carried out an exchange of Brady bonds and Eurobonds for new 12-year and 30-year bonds, which involved a 40% haircut for creditors. Holders of approximately 97% of the outstanding $6.46 billion in debt took part in that exchange.

The government's proposal comes just six days before general elections in which Correa will again be a candidate for president.

   -By Mercedes Alvaro, Dow Jones Newswires; 5939-9728-653; [email protected]

I suspect this had also previously happened in the late 1980s.

Maybe BHO should learn from his Marxist Ecuadorian friends, He could also offer a 'haircut' to China, and Japan...
 

[briann]

And who will bail them out??? hmmm?

[Sentinel For Truth]

Obongo will never learn because he's using Karl Marx's playbook.  At some point, we're going to default on our bonds either outright like they did, or by printing the money and monetizing the debt.  Lenin destroyed the middle class through hyperinflation in the Soviet Union.  Given all the fiat currency printing by the Fed, it's amazing how the US Dollar has stayed as strong as it has.  Either way, we're as bankrupt as they are.  Welcome to the banana republic United States... except without the bananas and without the republic!