Investors in the United States and abroad were grappling today with the announcement late Wednesday that Ecuador would delay a $96 million debt payment due this weekend and would move for a massive restructuring of $6 billion worth of so-called Brady bonds.
The decision by Ecuador to seek a restructuring, a move backed by both the United States and the International Monetary Fund, was being viewed as the only recourse for the Andean nation of 12 million people embroiled in its worst financial crisis in half a century.
Ecuador is too small to have a major effect on Latin America's already ailing regional economy. However, the stock markets in Argentina, Brazil and Mexico all fell today, partially on worries about Ecuador.
If Ecuador is unsuccessful in the negotiations and defaults on its debt, it could make lenders even more jittery about the region--squeezing Latin American capital markets even more at a time when the region is struggling through its worst economic downturn since the 1980s, analysts say.
"I think there is very little chance of a worst-case scenario--of seeing other countries in Latin America move to restructure their debt," said Gustavo Arteta, director of the Quito, Ecuador-based Economic Research Corp. (Cordes). "But debt prices and access to capital will depend partly on Ecuador's ability to successfully negotiate with its investors."
Ecuador is the first nation to renegotiate Brady bonds, which were named for former U.S. treasury secretary Nicholas Brady and were created mostly to give Latin American nations a way to pay back defaulted loans during the region's debt crisis in the 1980s. The bonds were used to repackage their debt into new issues traded on international markets.
Ecuador's decision to use a 30-day grace period to work out a solution to its debt payment troubles creates an immediate problem for thousands of investors, who analysts say include large funds as well as smaller investors who bought into high-performing Latin American bonds before the current economic downturn hit. Now, those who hold Ecuador bonds will be asked to accept payment below their face value, which has already slipped as low as 25 cents to the dollar.
In a nationally televised speech Wednesday night, Ecuadorean President Jamil Mahuad, who is under the threat of impeachment by a Congress controlled by his political opponents, said it was "impossible" for the troubled nation to continue servicing its external debt. Ecuador's economic problems stem from a number of sources, including the devastating effect of the El Nino weather phenomenon on crops last year, government overspending, popular resistance to economic reforms, low oil prices that have only recently rebounded and a banking system saddled with bad loans.
Though Ecuador has yet to publicly outline its restructuring plan, government sources and analysts say it will try to convince investors to accept newly issued bonds that would temporarily pay no interest. The government also would offer to buy back, at a still-unknown discounted price, some of its bonds by selling off part of the $800 million in U.S. Treasury bonds that was used as collateral for its Brady bonds. But with mounting distrust of emerging market bonds--especially Latin American bonds--by investors, the plan would at best be difficult to implement, experts say.