Ecuador's default is likely to hit Venezuela

Hugo Chávez and Rafael Correa are expected to negotiate (File Photo / AFP)

Economy
Last week, Ecuadorian Minister of Finance María Elsa Viteri announced that her country decided to use a 30-day grace period to suspend interest payments on its foreign debt after auditors found "strong indications of illegality".

Therefore, Ecuador has delayed payment of USD 30 million in interests on a bond issue of USD 385 million. However, Hugo Arias, coordinator of the Special Commission for Foreign Debt audit, said in an interview published by the Ecuadorian newspaper El Universo, that there are reasons to default.

"There are indications of illegality, abuse and illegitimacy in all the tranches," said Arias. He added that "Ecuador would default on USD 10.3 billion in national debt, which would be a historic achievement for the country."

Financial sources claim that a likely Ecuador's default would affect Venezuela's finances.

The Venezuelan Ministry of Finance reportedly own some USD 300 million in structured notes, issued by foreign banks, through which the government invests in the yield of Ecuadorian bonds.

According to the provisions of the structured notes, if Ecuador defaults, Venezuela would receive the Ecuadorian bonds and would have to make attempts at collecting the payment directly through a negotiation with the government of President Rafael Correa.

While this can have a negative effect on Venezuelan economy, a moratorium on the payment of all the Ecuadorian debt would increase the aversion of foreign investment funds to purchase Latin American bonds at a time when the decline in the price of commodities has forced most countries to seek financing.

Venezuela's country risk, an indicator that shows the premium an investor requires in order to buy Venezuela bonds instead of US Treasury bonds, was 14.6 percent on November 14, a fairly large percentage, which would further increase with a default by Ecuador. In fact, Venezuela's country risk is the highest in the region, after Argentina (18.4 percent).

The collapse of the price of Argentinean bonds has also hit the portfolio of the Venezuelan Ministry of Finance.

Chávez's government paid USD 2.4 billion to buy Argentine bonds due on 2012 at 68 percent of its value. Last week, these papers began trading at 20 percent of its value. The Ministry of Finance has not reported clearly the amount of Latin American debt it owns.

Link: http://english.eluniversal.com/2008/...

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