Reply #67: Default would send shockwaves round world (Ecuador)

[54anickel]

http://www.ft.com/cms/s/bb7866b2-bb06-11db-bbf3-0000779e2340.html

Published: February 13 2007 02:00 | Last updated: February 13 2007 02:00

If Ecuador fails to pay interest on its debt this week the move could resonate far beyond its borders.

Investment bankers, hedge funds and other investors around the world are watching developments closely - for the potential impact on the broader emerging markets and on a new, but fast-growing, sector of the financial world known as credit derivatives.

There have been very few defaults by sovereign borrowers in recent years, following history's biggest - on about $100bn (€77bn, £51bn) of debt - by Argentina in 2001. Moreover, few governments have defaulted on debt when their ability to pay has not been in much doubt.

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A failure by Ecuador to pay, even temporarily, would serve as a stark reminder to investors of the often un-quantifiable risks associated with emerging markets.

Some analysts doubt that missing this week's interest payment would have more than a limited effect on broader emerging markets sentiment, because Ecuador's debt counts for only a small portion of the market. But investors are on alert in case a default creates ripples elsewhere, particularly since markets are trading at levels that suggest investors do not expect to see defaults occur.

Risk premiums on emerging market debt, which indicate how investors feel about default risk, remain near all-time lows. JPMorgan's EMBI+ index, a market barometer, indicates that emerging market debt gives investors just 168 basis points more return than comparable US Treasury bonds, not far from all-time lows for this index.

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Ecuador, Pondering Debt Default, Turns to Chavez for Funding
http://www.bloomberg.com/apps/news?pid=20601086&sid=a2GXAsbmgAcA&refer=latin_america

Feb. 14 (Bloomberg) -- Ecuadorean President Rafael Correa, who is considering defaulting on the country's $10 billion in international debt, is turning to Venezuela's President Hugo Chavez to cover an expected budget deficit this year.

Ecuador is short of funds to make a Feb. 15 interest payment on its benchmark bonds and will take advantage of a 30- day grace period, Deputy Finance Minister Fausto Ortiz said this week. Correa, 43, will send officials to Caracas Feb. 21 to discuss what kind of backing Venezuela can offer, Ortiz said.

``The intention is to go to Caracas to see exactly what the conditions are, to see if it involves buying bonds,'' Ortiz told reporters in Quito. ``We'll have to see exactly what the conditions of the financing are.''

For Chavez, supporting Correa's socialist government would match efforts to bolster other regional allies as he seeks to expand his reach and diminish U.S. influence. In the past year, Venezuela bought bonds from Argentina and jointly issued international bonds, which allowed the country, after a debt default in 2001, to raise funds in U.S. dollars.

``They're not sure what kind of debt restructuring proposal they'll offer. One of the first steps has got to be to cement support from Venezuela,'' said Gianfranco Bertozzi, a Latin America economist at Lehman Brothers Holdings Inc. in New York.

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``If Ecuador defaults, it would be the first time a government does so out of a change in willingness to pay,'' he said. ``Normally, when you go to the negotiation table, there's recognition that there's no money,''

Ecuador's Finance Minister Ricardo Patino last month said the government may pay foreign creditors as little as 40 cents on the dollar to free up funds for heath care and education. Last month, the government doubled a cost of living subsidy for the elderly and disabled at a cost of up to $400 million. Correa has also promised increased housing assistance for the poor.

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