Ecuador’s President Rafael Correa announced yesterday a controversial move to buy back the country’s 2012 and 2030 bonds at only 30 cents on the dollar. Investors are less than pleased, though probably not surprised. Last December, Correa’s government failed to make a scheduled interest payment on its 2012 bonds. At that point, the government’s two other global issues (2015 and 2030), were also considered in default.
That default, unlike the bulk of past defaults in the region, was not caused by empty coffers. Ecuador’s debt is currently less than 20 percent of GDP—a relatively light burden. Argentina’s debt at the time of its 2001default, by comparison, was “equivalent to 150 percent of its GDP.” Correa instead justified the move on moral grounds, calling the debt “immoral and illegitimate.” An audit commissioned by Correa found evidence of criminal wrongdoing in the issuance of its foreign debt.
How investors will react to yesterday’s news is uncertain, especially in this economic climate. But one thing is certain. Correa’s tough stance has bolstered his popularity at home, and increased his odds of an easy re-election this coming Sunday. Polls from Cedatos-Gallup and Santiago Pérez Investigaciones y Estudios show Correa with between 49 percent and 52 percent support, which would provide a first-round victory.