Ecuador Yields Surge Above 20% as Oil Rout Boosts Default Risk

(Bloomberg) -- Ecuador’s dollar bonds slumped the most in emerging markets as investors price in a higher probability of default following the crash in crude prices.

The nation’s dollar bonds due 2028 fell 10.6 cents to 47.6 cents on the dollar on Monday, sending the yield surging 4.3 percentage points to 22.3%. The extra yield investors demand to hold Ecuadorian debt over U.S. Treasuries blew out 753 basis points to 27.33 percentage points. That compares to 28.16 percentage points for Argentina which is preparing to restructure its debt.

Current prices discount “a high probability of default,” for the oil producer, said Siobhan Morden, the head of Latin America fixed income strategy at Amherst Pierpont Securities in New York. “The oil shock should dominate near term and requires an aggressive counter-response from authorities to manage cashflow stress.”

Oil crashed more than 30% on Monday after the breakup of the OPEC+ alliance triggered an all-out price war, with both Russia and Saudi Arabia poised to flood the market with cheap oil. The government was already struggling to meet its funding needs even before the oil price slump, and Moody’s Investors Service cut its credit rating deeper into junk last month, to Caa1.

The finance ministry didn’t immediately reply to a request seeking comment.

Public hostility is making it harder for the government of President Lenin Moreno to boost tax revenue or curb spending.

The country suffered nearly two weeks of violent unrest in October when the government tried to end subsidies on diesel and gasoline, and was forced to back down due to demonstrations.

Last week the government said that it’s negotiating to receive disbursements from the International Monetary Fund as part of a $4.2 billion credit agreement. The fund is expected to support the government’s financing needs this year and in 2021.

--With assistance from Aline Oyamada.

To contact the reporters on this story: Matthew Bristow in Bogota at mbristow5@bloomberg.net;Stephan Kueffner in Quito at skueffner1@bloomberg.net

To contact the editors responsible for this story: Juan Pablo Spinetto at jspinetto@bloomberg.net, Daniel Cancel

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