Honduras Needs to Restructure ‘Unsustainable’ Debt, Incoming President Castro Says

(Bloomberg) -- Just minutes into her term as president of Honduras, Xiomara Castro rocked financial markets when she told the crowd gathered for her inauguration that she would seek to restructure the country’s debt.

It was not immediately clear whether Castro, a progressive activist with little experience in finance, merely misspoke or truly plans to default on the government’s $13 billion of foreign debt but investors were blindsided by the announcement. They had been trading the government’s benchmark bonds at par, signaling little concern about the possibility of default, and immediately pushed them down more than 3 cents to as low as 96.4 cents on the dollar.

“It’s evident that the state doesn’t have the capacity to sustain the thunderous and suffocating debt that we are inheriting,” Castro said. “It’s practically impossible to meet debt maturities. The only way is a process of comprehensive restructuring through an agreement with public and private creditors.”

During her inaugural address on Thursday, Castro also said she would seek to renegotiate a free trade agreement with the U.S.  

Castro also promised “democratic socialism” during her 4-year term, and said she would seek to renegotiate CAFTA-DR, the nation’s free trade agreement with the United States, to improve conditions for farmers. 

She pledged to make electricity free for many small consumers, and to create a gasoline subsidy, but also pledged “strict monetary and fiscal policy.” 

Attending Castro’s swearing-in ceremony were U.S. Vice President Kamala Harris, Taiwanese Vice President William Lai and Argentina’s Vice President Cristina Fernandez de Kirchner.

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