November 17, 2008
The official overseeing an audit of Ecuador’s foreign debt said his committee found evidence of abuses and irregularities tied to almost all of the country’s bonds and will recommend a default on $10.3 billion in national debt.
Auditors have uncovered “indications of illegality” in the debt contracts and negotiation processes, said Hugo Arias, coordinator of the Special Commission for Foreign Debt Audit, in an interview published Monday by the Ecuadorean newspaper El Universo.
Arias did not respond to telephone calls Monday.
If Ecuador defaults, one debtor left holding the bill will be the government of close Correa ally Venezuelan President Hugo Chavez, though it is unclear how much of the debt Venzuela holds.
Ecuador has delayed $30.6 million in interest payments that was due Saturday on 2012 bonds, using a 30-day grace period to assess the results of the audit scheduled for release on Thursday.
President Rafael Correa suggested that previous governments mishandled debt negotiations and abused privileged information for personal financial gain, ordering the audit in 2007. Finance ministers allegedly forced down the price of Ecuador’s bonds by threatening to default, then bought them on the cheap before refinancing the nation’s debt and restoring the value of their holdings.
Arias, the auditor, did not give names, but called the debt “a giant and unpayable monster” and said a default on the bonds – held by foreign governments, private investors and others – would be “a historic achievement for the country.”
Suspending the interest payment already sent Ecuador’s benchmark bonds plummeting and will likely freeze already tight credit flows and investor interest in the nation’s oil and mining sectors.
Standard & Poor’s has slashed Ecuador’s long-term debt rating.
Correa ran for president in 2006 vowing to default on Ecuador’s foreign debt and use the money to fund anti-poverty programs. He has not acted on that threat, but recently warned that falling oil prices may force his hand. Oil is Ecuador’s top source of foreign income, and prices have dipped 60 percent since July.
Exactly how many Ecuadorean bonds Venezuela holds is unknown, but market speculation is that the country could lose up to $800 million in the case of a default, said Enrique Alvarez, head of research for Latin American financial markets at IDEAglobal in New York.
Categories: Odious Debts