The delay would give President Lenin Moreno's administration another four months to reach a longer term restructuring deal with creditors. It may be the only alternative to a messy default that would damage investor portfolios and devastate the South American nation, which has repaid just two bonds since its independence from Spain two centuries ago.
Economically, Ecuador could hardly be in a worse place. The tropical city of Guayaquil has been a hot spot for the pandemic, while the slump in oil prices has weakened the nation's fiscal revenue, pushing bond prices deep into distressed territory. Adding to the misery, a recent landslide damaged Ecuador's two oil pipelines, forcing it to declare force majeure on exports.
"There is no solution near term other than to seek near-term liquidity relief," said Siobhan Morden, head of Latin America fixed-income at Amherst Pierpont in New York. "The best Ecuador can offer is some friendly re-profiling of payments that reduces the risk of a worse restructuring" after the nation's presidential election next year.
The nation's bonds have returned -69% this year to lead emerging-market losses, according to data compiled by Bloomberg. Ecuador's benchmark notes due in 2028 have slumped to 27 cents on the dollar from more than 90 cents in early January. In the past week, the risk premium surpassed levels during the 2008 global financial crisis and the debt crisis of the late 1990s.
Ecuador has reported 388 coronavirus deaths, the second-most in South America, and authorities caution that the actual figure may be much higher.
Ashmore Group, BlackRock and Goldman Sachs are the largest reported holders of the nation's debt, according to data compiled by Bloomberg. They have a stark choice.
"If bondholders do not accept the deal, the government will default," Eurasia Group analysts Risa Grais-Targow and Laura Duarte wrote in a report.
Finance Minister Richard Martinez said Wednesday that he was optimistic investors would accept the delay request. He estimated $1.35 billion in savings if the government doesn't pay interest on its debt in the coming months.
"The moment that Ecuador suddenly stops paying and enters into a default the consequences for the country are extremely onerous, extremely grave," Martinez said in an online speech.
Still, the government may need to extend Friday's deadline for an agreement, said Jim Craige, a money manager at Stone Harbor Investment Partners in New York. With the logistical challenges of working from home, he said some bondholders may need more time before accepting the request.
"They are trying to get past this global economic hit and maintain friendly relations with creditors," he said. "They don't want to default."
Investors are likely to sign on to the government's proposal for those bonds with a 50% approval threshold, though achieving a 75% threshold for the notes due in 2024 may prove a bigger challenge, according to Jose Orellana, partner at Bizbrokers in Guayaquil. The notes requiring 50% approval when all added together need at least a two-thirds majority.
Orellana said Ecuador's economy will probably shrink 4% to 8% this year, potentially sweeping a more-extreme populist government into office next year, which should give bondholders pause for thought.
"At least right now, they're talking to someone who is market-friendly," Orellana said.
Published : April 16, 2020
By : Syndication Washington Post, Bloomberg · Sydney Maki, Ben Bartenstein, Stephan Kueffner · BUSINESS, WORLD, US-GLOBAL-MARKETS, THE-AMERICAS