Skip to main content

World’s Costliest Bond Sale in Decade Shows Ecuador Cash Crunch

By Katia Porzecanski and Nathan Gill
(Bloomberg) -- Six years ago, Ecuador President Rafael Correa’s government denounced the 10 percent in annual interest the country paid on its bonds as “usury.”

So when the 51-year-old former economics professor was willing to pay 10.5 percent in a sale of notes this month, it raised speculation the OPEC nation may be running short of cash after oil prices collapsed.

Before the March 19 sale, Ecuador told potential buyers it wanted to pay less than 8 percent to borrow at least $1 billion for as long as seven years, two people with knowledge of the offering said. Instead, the Andean nation got just $750 million for five years at yields that were more than two percentage points higher.

The sale “indicates that they are running into trouble,” Sarah Glendon, an economist at Gramercy Funds Management LLC, said by telephone from Greenwich, Connecticut.

The more than 50 percent plummet in the nation’s oil prices from their June peak last year caused bond investors to demand more compensation to finance Ecuador’s widening budget shortfall, less than a year after the country borrowed $2 billion for a decade at lower rates.

Even after a round of spending cuts, the government, which gets about a quarter of its revenue from oil, has a record $10.5 billion of financing needs this year. That’s compelled Correa to court banks, international investors, companies and foreign governments to close the deficit.

Yield Curve

In the latest sale, the annual interest that Ecuador agreed to pay to issue five-year bonds was the highest of any comparable dollar-denominated security since an offering by Turkey in 2002, according to data compiled by Bloomberg.

The yield was also higher than on Ecuador’s bonds due in 2024, which is unusual because shorter-dated debt usually carries lower borrowing costs.

Yields on the 2024 securities have jumped 0.95 percentage point since the country started meeting with investors to discuss the sale of the new notes to 9.86 percent. During the same period, average yields for developing nations fell, according to indexes from JPMorgan Chase & Co.

The Finance Ministry and Economic Policy Ministry didn’t respond to telephone messages or e-mails seeking further comment on the bond sale.

On the night before this month’s sale, Economic Policy Minister Patricio Rivera told reporters in Quito that Ecuador would opt for cheaper funding sources from other governments until bond market conditions were better.

Energy Prices

“Then they came, out of the blue, with a five-year at 10.5 percent, saying pricing would not tighten and implying that they would take as much as the market was willing to give them,” said Marco Santamaria, a money manager at AllianceBernstein LP in New York. He declined to comment on whether he bought the bonds.

Finance Minister Fausto Herrera told reporters after the sale that the government didn’t get the “best conditions.” Energy prices fell during the government’s roadshow with investors earlier this month, forcing Ecuador to accept worse terms than it wanted, Herrera said.

Yields on the notes due 2020 were unchanged at 10.41 percent as of 3:06 p.m. in New York.
Correa said Saturday that the economy was strong and that the government was ready if oil prices kept falling.

‘Extreme Cases’

“We’re prepared for extreme cases, even if oil prices fall to $20 a barrel,” Correa said in his weekly speech to the nation. “We know how to handle these difficult times.”

Before Ecuador defaulted on about $3.2 billion of foreign bonds in 2008 and 2009, a government-sponsored commission formed by Correa concluded that much of the debt taken out by previous governments was illegal, in part because of the high interest rates charged.

The fact that Ecuador was willing to issue debt with such high interest rates is “very unusual,” said Siobhan Morden, the head of Latin America fixed-income strategy at Jefferies Group LLC in New York.

“This deal made Ecuador look desperate,” Morden said.

Comments

Popular posts from this blog

Moving to the Suburbs: Reducciones in Recent Latin American Historiography

In 1503, the Spanish monarchy issued its first decree for the resettlement of indigenous groups in the Caribbean so that they would “live together” and “not remain or wander separated from each other in the backcountry.”[1]

As the European conquest spread to North, Central, and South America, these new settlements – known as reducciones and congregaciones in Spanish and descimentos in Portuguese – became sites of forced labor, evangelism, experimental agricultural, and refuge. Through a series of imperial policies decreed over the next decades and centuries of colonial rule, Spanish and Portuguese officials attempted to reshape the New World, including its human and natural landscapes. How colonial historians explain this process and indigenous peoples’ reactions to it is the focus of this essay.

In a review of the recent historiography of reducciones, several trends emerge that signal a shift in our understanding of the practice. As this paper will show, one common element is that …

77-Year-Old Wall Street Favorite to Face Fujimori in Peru Runoff

By Nathan Gill and John Quigley April 12, 2016 (Bloomberg) -- The victory by Pedro Pablo Kuczynski, a former finance minister, for second place in Sunday’s Peruvian president elections sets up a showdown between two business-friendly candidates, part of a regional backlash against left-wing politicians.
Kuczynski, a 77-year-old Oxford-trained political economist who’s spent more than 50 years championing debt control and free trade, won 21 percent of vote with 96 percent of the ballots counted, according to the electoral office. He will face Keiko Fujimori, who won 39.8 percent, in a second-round vote on June 5.
Click here to read the full story on Bloomberg News.

Greetings From Gringolandia

Bloomberg Businessweek, March 28 — April 3, 2016
Susan Lamy and her husband, Jean Pierre, owned a successful interior design business in Westport, Conn., but they still worried about how they would make ends meet in retirement. “Just paying for the basic necessities was killing us, and we could see that there was no way that we would ever be able to stop working,” says Lamy. 
The search for an affordable retirement spot led the couple to Cuenca, a Unesco World Heritage site in Ecuador’s southern Andes. They settled there in 2013 and now live in a spacious apartment with a terrace overlooking the Yanuncay River. Lamy says she and her husband enjoy a high standard of living in Cuenca for around $2,500 a month, paid for by their Social Security checks: “This seemed to be the best possibility for having a really terrific life on a fixed income.” 
The combination of a subtropical climate, well-preserved colonial architecture, and low cost of living has made Cuenca a magnet for North Ameri…