Ecuador debt arrangements - important

[Robert Weissman <rob@essential.org>]

Ecuador's restructuring plan sparks debate
Financial Times ; 28-Aug-1999

With Ecuador's move to restructure its Brady bonds, the tiny country of 12m
people has been thrust into the centre of a fierce debate between public and
private creditors over who should take responsibility when a country is
unable to meet its obligations.
The outcome of that battle will help determine the shape of the new global
financial architecture, which has remained largely unchanged since the
Bretton Woods institutions - the World Bank and the International Monetary
Fund - came into being half a century ago.
On Wednesday, President Jamil Mahuad said the government would invoke a
30-day grace period on $96m of interest payments due today, during which
time it hopes to negotiate the exchange of the Bradys for non-collaterised
bonds.
A technical mission from Ecuador's finance ministry will travel to New York
this week to sell to investors its proposals to exchange Dollars 6bn of
Brady bond debt for new paper.
In the process, it will become the first country ever to attempt to
restructure this type of debt.
Brady bonds came into being in the wake of the 1980s debt crisis, and bear
the name of the former US Treasury secretary, Nicholas Brady.
They allowed countries that had defaulted on their bonds to re-enter the
capital markets by repackaging the bonds with US Treasuries as collateral.
Essentially, private creditors agreed to forgive some developing nation debt
in return for stronger guarantees that they would eventually be repaid.
Now, the IMF and US have publicly backed Ecuador's efforts to restructure
its Dollars 13bn in foreign debt, around half of which is in the form of
Bradys.
With the support of the US, Ecuador will then move to renegotiate its
Dollars 1bn of debt outstanding with the Paris Club of creditor nations.
Official lenders such as the IMF and the Paris Club have increasingly been
demanding that private creditors take some responsibility for their credit.
Stung by charges that they are effectively bailing out private lenders with
public money thereby encouraging risky lending, official lenders have urged
Pakistan and Ukraine to restructure their private debt along the same lines
as their official debt.
Private lenders have countered that defaulting nations will choke off future
lending.
Bondholders also worry that Ecuador will now set a dangerous precedent,
making it easier for other countries to follow in its footsteps.
"Ecuador is being used as a laboratory test-case in order to set precedents
for other emerging market countries, such as Algeria, and others in Latin
America," said Walter Molano, head of Latin American research at BCP
Securities.
"Finance ministers across the continent will be watching very closely to see
what happens in Quito. If it's a favourable restructuring which allows the
government to get out of its obligations, people will follow suit."
Key to Ecuador's strategy will be an attempt to differentiate between its
Brady bonds and its other international bonds, which it will continue to
service as normal.
The country intends to issue new bonds to investors who will simultaneously
hand back their Brady paper, said Agustin Hurtado, finance ministry general
co-ordinator.
He said it would then use part or all of the collateral on the Par and
Discount bonds - which are backed by US Treasury bills - to make some cash
payments to investors in lieu of its debts.
The new bonds are likely to be bear a maturity of less than the 30 years
carried by the Bradys, although Mr Hurtado said interest rates had yet to be
determined.