Ecuador’s Congress called on the government to suspend debt payments to free up cash to deal with the coronavirus pandemic, sending the nation’s bonds deeper into distressed territory.
Ecuador’s US$3 billion of bonds due in 2028 fell three cents to a record low 31.5 cents on the dollar, pushing yields to 32 percent. The South American nation has about US$320 million of debt coming due on Tuesday and coupon payments later this week.
Lawmakers from all major parties want the government to prioritise the coronavirus crisis, rather than pay multilateral lenders and foreign creditors, according to a statement released 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. Still, if the nation halted payments, it would lose more than it would gain, said economist Alberto Acosta Burneo at Grupo Spurrier.
“We’d stop paying US$2.2 billion in amortisations but would be barred from receiving US$5.5 billion” already agreed to with multilateral lenders, Burneo said.
The call from Congress is probably intended to get concessions from President Lenin Moreno’s administration on stimulus measures, and may be a way to nudge the International Monetary Fund into sending a relief package more quickly, said Oren Barack, the managing director of fixed income at New York-based AGP Alliance Global Partners.
“I’d be very shocked if Ecuador suspended payments,” Barack said. “At these prices, it’s definitely an opportunistic buying opportunity.”
The nation’s finance ministry didn’t immediately comment on the congressional request.
Ecuador is the most distressed sovereign credit not currently in default. Investors demand 56 percentage points more than US Treasuries to hold the notes, according to JPMorgan Chase & Co.’s EMBIG Diversified Index.
Moreno and his government have vowed to stay current on their foreign bonds and were trying to push through reforms as part of the IMF lending agreement before the virus hit.
If the government makes Tuesday’s payment, it would be only the second time it 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. “Larger payments are only due post-2022 and they should be able to get more flexibility from bilateral and multilateral lenders to improve the liquidity situation.”
Ecuador has a US$4.2-billion financing agreement with the IMF whose latest disbursal has been delayed over failure to meet targets.
A group of senior local economists over the weekend also suggested a suspension of payments on the condition it was approved by the IMF. The funds should immediately go to health services and to support the poor, they sai.
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.
The government has thus far offered recipients of a US$65 monthly cash payment US$60 for March and April, while public and private banks have pledged continued lending and deferrals of some interest payments to cope with the crisis.
“There is clear urgency for seeking external capital and broader debate is necessary about whether a default would backfire,” Siobhan Morden, who heads Latin American fixed income strategy at Amherst Pierpont Securities, wrote in a report.
by Stephan Kueffner and Ben Bartenstein, Bloomberg