Monday, April 20, 2009

The Ecuadorian Two-Step

The Ecuadorian government led by Rafael Correa has just launched a proposal to complete a quite impressive and unorthodox debt restructuring.

Ecuador is offering to repurchase its Global 2012 and Global 2030 bonds for cash at around 30 cents on the dollar according to this Bloomberg release.

It’s a great financial move, as the country will take advantage of the deep discount that its bonds are trading at and save a ton of cash going forward. Of course, the reason those bonds are trading so cheap is because they defaulted on them (failed to pay interest) back in November, not because they didn’t have the cash to pay, but because they claimed that the debt was contracted illegally.

These same bonds were trading close to par as recently as September 2008, so this chain of events has been quite shocking for holders of Ecuadorian debt.

Maybe its more shocking that people were actually surprised by all this. President Correa was voted into office with an anti-debt rhetoric, he created a commission to study the “legality” of the debt in 2007.

And in a complete shock said commission concluded that the 2000 restructuring in which the 2012 and 2030 bonds were born was an inconvenient and illegal deal for Ecuador, or pretty much the same conclusion that CORREA HIMSELF reached in this 2005 paper. LINK
(In Spanish…don’t bother reading, it won’t win a Nobel).

What is it with Latin American leaders? They TELL you what they plan to do, and people are shocked when they do just that.

So recapping…here is the Ecuadorian two-step:

1. Default on Debt
2. Buy it back on the cheap.

Repeat several times for best results.

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