Across the world, government bondholders have seen losses pile up this year as a pickup in inflation and economic growth puts central banks under pressure to raise interest rates, Bloomberg News reported. That makes even more remarkable the windfalls seen in Ecuador, a junk-rated South American nation that was mired in recession even before the pandemic and was forced to restructure $17.4 billion of debt last year -- a step rating companies considered a default.
Ecuador bonds fell for a second day as Sunday’s presidential election threatened to throw the Latin American nation back into economic turmoil, Bloomberg News reported. With less than 1% of votes left to count, Ecuador is heading for an April runoff between leftist Andres Arauz, with almost a third of the vote, and the indigenous party’s Yaku Perez, with 20.10%. To investors’ surprise, market friendly Guillermo Lasso is third with 19.49%, according to the National Electoral Council’s latest count.
Sovereign default risks are on course to rise further in 2021, with Iraq, Sri Lanka, Angola and Gabon at high probability of default, say Goldman Sachs analysts, Reuters reported. Five sovereign debt defaults or distressed debt exchanges - in which investors swap their debt for new bonds, often with longer maturities and a reduced value - have already happened in 2020 in the aftermath of the COVID-19 crisis, the most in around two decades.
Countries do not usually gain friends when telling creditors they can’t pay them back. Yet Ecuador earned serious plaudits as it went about restructuring $17.4bn of bonds this year, GlobalCapital reported. The Ad Hoc Bondholder Group that owned more than half of the sovereign’s bonds even said that the process “set a precedent” for Covid-19 era restructurings. Jan Dehn, head of research at Ashmore, part of the Ad Hoc group, explains that on one hand the group was referring to modifications in collective actions clauses that some creditors hope will become standard practice.
Rafael Correa, the leftist leader who governed Ecuador for a decade and defaulted on its debt, and his protégé in next year’s presidential election said they would reject the spending cuts requested by the International Monetary Fund as part of a loan deal, Bloomberg News reported. “These austerity policies kill economies,” Correa said in an interview from exile in Belgium. “We’ll check all of this.
The International Monetary Fund agreed to lend Ecuador $6.5 billion which will allow the nation to complete a bond restructuring plan and fund its 2020 budget, Bloomberg News reported. The deal announced Friday will enable the exchange of $17.4 billion of debt to go ahead before the Sept. 1 deadline. The country had agreed with bondholders that it would seek a new IMF deal, and that the restructuring wouldn’t go ahead without one.
As serial defaulters Argentina and Ecuador near the finishing line on their latest sovereign debt overhauls, foreign creditors are nervy about investing again without macroeconomic reforms and International Monetary Fund support, Reuters reported. On the surface, the prospects for both countries look brighter. Absent complicated negotiations with the IMF, a clean slate post-debt restructuring will allow them to focus on reviving their COVID-19-ravaged economies with much less concern about looming foreign debts to repay.
Ecuador is aiming to secure additional financing by the end of August to help plug its fiscal gap after wrapping up a deal to restructure $17.4 billion of debt, according to Finance Minister Richard Martinez, Bloomberg News reported. President Lenin Moreno’s administration is negotiating a new program with the International Monetary Fund as well as some $2 billion in bilateral loans from China. Martinez said the Asian Infrastructure Investment Bank is also considering a $50 million loan to support small and medium enterprises. “August is key,” Martinez said in an interview from Quito.