On the newswires recently:
QUITO, Ecuador – Ecuador vowed Friday to delay a $30.6 million interest payment on its foreign debt while it investigates possible irregularities in the contracts, sending its benchmark bonds and credit rating tumbling as default fears soared.
Finance Minister Maria Elsa Viteri said Ecuador won’t make Saturday’s payment, and is instead invoking a 30-day grace period to review an audit of 2012 bonds worth $1.25 billion. The audit is due next Thursday.
Standard & Poors devalued the country’s long-term debt rating by three notches, from B- to CCC-, citing the “severe uncertainty” that Ecuador will ultimately pay up. The ratings agency warned it would further slash its rating to “SD” or “selective default,” if the government signals plans to restructure its debt.
Full article here.
Another article on BBC:
Last week Ecuador won itself a place in economic history books when it became the first country to default on its Brady debt.
The default doesn’t just set a first for Ecuador, it is also likely to set a precedent for how government and investors behave when borrowers default.
The question is: whose responsiblity is it when a borrower can’t pay the money it owes?
Last year, official lenders, such as the IMF, came under fire for effectively bailing out private investors with public money during and after the Asian crisis.
The interesting thing? These two articles are nearly ten years apart. Ecuador had defaulted on its Brady Bonds during the time following the Asian Crisis. Now it seems we have come full circle again, but its the US recession and mortgage crisis that is the theme.
The catalyst for Ecuador’s economic woes is falling Oil prices, which comes at an inopportune time for the incumbent Ecuadorian President, Rafael Correa:
Ecuador, is in fact, an oil-dependent economy. Over 60 percent of its $13.7 billion in exports consist of crude oil, according to the Ecuadorian Central Bank. Oil revenues finance about 40 percent the country’s budget. And according to a J.P. Morgan study, every $10 drop in the oil price would lead to an increase in the current account deficit equivalent to 2 percent of the country’s GDP, and an increase in the fiscal deficit equivalent to 1.3 percent of GDP.
In other words, President Rafael Correa’s ambitious social spending—which doubled in a year—has to slow down. The U.S.-educated economist has to reduce his expenses in the midst of his campaign for reelection, next March 2009. Correa is reluctant to do so, and has stated that he’d rather default on the country’s global bonds payments.
Full article here.
Ecuador’s story is just one example of how interrelated all global economies are. People like Peter Schiff have commented elsewhere how other countries will definitely reel from the global slowdown caused by a US recession, but those countries that have good production capacity will outperform in the long-run. For Ecuador’s case–their dependency on Oil, previously a boon, is now a liability.