Ecuador Default Odds Surge as Virus Prompts Calls for Moratorium
Ecuador Bonds Sink as Congress Suggests Suspending Debt Payments
(Bloomberg) -- Ecuador’s Congress called on the government to suspend debt payments to free up cash to deal with the coronavirus pandemic, prompting JPMorgan Chase & Co. to warn of a potential default as soon as Tuesday.
The South American nation’s $3 billion of bonds due in 2028 fell 3.5 cents to a record low 31 cents on the dollar, pushing yields to 33%. Ecuador has about $320 million of debt due tomorrow and coupon payments later this week.
Lawmakers from all major parties want President Lenin Moreno’s administration to prioritize the coronavirus crisis, rather than pay multilateral lenders and foreign creditors, according to a statement late Sunday. Ecuador had 981 cases of Covid-19 and 18 deaths at last count, only behind Brazil with the most cases in Latin America.
“We think the government will feel intense political pressure to comply, putting tomorrow’s payments in doubt,” JPMorgan analysts Katherine Marney, Trang Nguyen and Ben Ramsey wrote in a report. “Our interpretation is that this announcement is timed to persuade the government to cease that payment.”
The finance ministry didn’t immediately comment on the congressional request.
Still, halting payments could prove costly, preventing Ecuador from receiving $5.5 billion in financing from multilateral lenders including the International Monetary Fund, according to Alberto Acosta Burneo, an economist at Grupo Spurrier in Guayaquil.
Buying Opportunity
The call from Congress is probably intended to get concessions from Moreno’s government on stimulus measures, and may be a way to nudge the IMF into sending a relief package more quickly, said Oren Barack, the managing director of fixed income at New York-based AGP Alliance Global Partners.
The government has a $4.2 billion financing agreement with the IMF whose latest disbursal has been delayed over failure to meet targets.
“I’d be very shocked if Ecuador suspended payments,” Barack said. “At these prices, it’s definitely an opportunistic buying opportunity.”
Ecuador is the most distressed sovereign credit not currently in default. Investors demand 59 percentage points more than U.S. Treasuries to hold the notes, according to JPMorgan’s EMBIG Diversified Index. Moreno’s government has vowed to stay current on its foreign bonds and tried to push reforms as part of an IMF lending agreement before the virus hit.
Political Pressure
If Ecuador makes Tuesday’s payment, it would be only the second time it has repaid a bond in its history dating back to 1830.
“A disruptive default would not be in their best interest,” said Shamaila Khan, the New York-based head of emerging-market debt at AllianceBernstein, which holds Ecuador bonds.
But other investors say Moreno has little incentive to pay.
“What’s the point?” said Patrick Esteruelas, the head of research at Emso Asset Management in New York. “You have $600 million in principal and interest payments this week, Treasury deposits at just over $800 million, Covid-19 spreading like wildfire and all the political parties basically boxing you into a corner by removing support for payment.”
The crisis has undermined the nation’s exports, with oil revenue curtailed by the plunge in crude prices and other industries hit by a strong dollar. At the same time, its central bank can’t print money to provide liquidity as Ecuador uses the dollar as its official currency.
“There is clear urgency for seeking external capital and broader debate is necessary about whether a default would backfire,” Siobhan Morden, head of Latin America fixed income strategy at Amherst Pierpont Securities, wrote in a note.
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