Ecuador: Bad Correa Move?
On November 14 Ecuadorean President Rafael Correa’s government took its first major step along its ‘citizens’ revolution’, by refusing to pay US$30.6mn of external debt on time. Correa has long threatened to put ‘life’ [social spending] before debt’, however his rhetoric was finally met with action (or rather inaction) last Friday when Finance Minister María Elsa Vitieri announced the government would invoke the 30-day grace period to review an audit of its US$ Global 12 bond.
According to Correa, the final verdict on the 2012 bond’s ‘legitimacy’ will be announced on December 15, once the 30-day grace period has expired. The real mystery, though, is not the audit commission’s findings (after all, it was Correa who initially commissioned the audit), but rather the president’s motivations for refusing to pay. Record oil prices earlier in the year mean we are not in a Pakistan-type scenario, where the country simply can’t afford to meet its external debt obligations. I can only assume, therefore, that his motives are political, but to what end?
Ecuador – US$ Global 2012 Bond
One possibility is that he wants to boost his popular support before next year’s general election, provisionally scheduled for April or May. However, if this is the case, surely a more politically opportune time to raise the default issue would be the coupon payment on the US$ Global 30 bond (also under investigation for ‘illegitimacy’ by the audit commission), due on February 15. The other possibility, which I see as more convincing, is that he genuinely wants to live up to his socialist credentials by demonstrating his disdain for international financial markets, something even his Venezuelan counterpart, Hugo Chávez, has so far refused to do. Whatever the motivation, an effective default is already being priced in by the US$ Global 12 bond (see chart), which would no doubt lead to a painful restructuring process, further exacerbating the already bleak outlook for Ecuador’s economy.