Ecuador’s Brady Bonds
Assignment: Compare Ecuador’s Brady Bonds, and advise a client on which is the best to buy at today’s prices by comparing the features, risks and potential of each.
Ecuador could become the first country to default on
Brady bonds, created to get countries out of a previous
``Ecuador is one more cloud on the horizon of emerging
market finance, and it cannot help but have a negative
impact,'' Dallara said.
Ecuador must decide soon whether to pay some $94
million in deferred Brady bond interest payments or
whether to default on the debt. Analysts say a default
would raise the cost of borrowing for all emerging
markets and cut the flow of private capital to these
September 22, 1999
Venezuelan Leader Pledges
Payment of All Debts
By JONATHAN FUERBRINGER
EW YORK -- In an effort to reassure foreign
investors, Venezuela's president said Tuesday that
his government would make all its debt payments while
at the same time work on a market-friendly proposal
that would allow it to pay off its current debt over a
longer period of time.
"We will continue to service our foreign debt, but we
want to reduce the profile," President Hugo Chavez
said through a translator at a New York news
conference, held in part to give him a chance to clear
up misconceptions about his economic policies.
His comments came as investors keep a close watch on
emerging markets in Latin America. Ecuador is
struggling to avoid a default on its foreign debt and
Brazil is still working to come back from the
devaluation of its currency in January.
Venezuela's news conference was organized by J.P.
Morgan Securities, which is offering the government
ideas on ways to rework its debt. As the session began,
Susana de la Puente, managing director for Latin
American investment banking at J.P. Morgan Securities,
noted that there had been "a lot of bad press about
Neither Chavez nor his finance minister, Jose Rojas,
would give any details of what kind of debt reworking
they were thinking of. But Ms. de la Puente said that if
any proposal was made to revamp Venezuela's $21.1
billion in foreign debt, it would be "market driven,"
adding that there would be no "involuntary
restructuring." She said it was possible to approach
investors with a deal allowing Venezuela to swap
current debt for new bonds. "We are waiting for the
right opportunity, a good opportunity to do it," Chavez
Investor concern about the political and economic
future of Venezuela has left its debt prices at levels just
above those for Ecuador and Russia. The Russians
have effectively defaulted, and Ecuador is scrambling
to work out a debt-restructuring plan that would avoid a
Brady bond default. Brady bonds, which are named for
Nicholas F. Brady, a former treasury secretary, were
designed as a way to repackage the billions of dollars
in unpaid bank loans to many Latin American countries
that they effectively defaulted on in the early 1980s.
The repackaging into bonds made the old loans more
attractive to investors because they could be traded
easily and came with guarantees on the principal and
interest of the bonds.
A 30-day grace period for Ecuador to pay $96 million
in interest and principal it owes on its Brady bonds
ends next Tuesday, right in the middle of the
International Monetary Fund's semiannual meeting.
Ecuador has not yet proposed how it will rework its
current Brady bonds, although there have been reports
that future oil revenue may be used as collateral.
Emerging-market analysts do not think debt
restructuring will be easy for Ecuador. And some say it
will not be able to meet the requirements of an IMF
economic program, which is a prerequisite for more
August 21, 1999
South American Markets Come
By SIMON ROMERO
AO PAULO, Brazil -- Latin America's currency
and bond markets came under pressure on Friday
as worries over the possibility of default by Ecuador,
one of the region's smaller countries, collided with
concern that political gridlock would slow its
Ecuadorean officials assured investors the government
would not default on a $93.5-million bond payment
later this month, but markets were skeptical.
Ecuadorean bonds plunged more than 11 percent on
speculation about a default.
A default would be the first on Brady bonds, the
repackaged securities designed by the former U.S.
Treasury Secretary Nicholas Brady, which helped Latin
America emerge from a debt crisis in the 1980s.
Brazilian markets, which often come under selling
pressure when troubles emerge in Latin America,
showed unusual signs of strain. Brazil's currency, the
real, weakened nearly 3 percent. It fell to almost 2
reais to the dollar, its lowest value in five months,
before rebounding to 1.89 on news that the government
had sold six-month dollar-linked bonds, offering
investors protection against further falls in the currency.
In New York, the real settled at 1.99 to the dollar,
down from 1.94 on Thursday.
Brazilian bonds were mixed. A basket of Brazil's
dollar debt lost as much as 0.9 percent, according to
J.P. Morgan & Co. The widely traded C bond gained as
much as 0.9 percent, to 58.813, with the yield
narrowing to 16.970 percent.
In neighboring Argentina, where the economy has been
hurt by a drop in commerce with Brazil, higher
borrowing costs added to concern about other countries
in the region. Moody's Investors Service placed the
nation's credit ratings on review Friday for possible
downgrade, a move that led Argentine bonds to fall
with the debt of other Latin American countries.
Ecuador, which in population and economic might is
substantially smaller than Brazil or Argentina, accounts
for just a sliver of investors' holdings of Latin
American securities. Yet the psychological effect of a
rapidly deteriorating economy there, and of concern
that neighboring countries could be influenced if it
defaults, has led to a fresh assessment of risk
throughout the region.
"The potential for contamination is there," said Arturo
Porzecanski, the chief economist for the Americas at
ING Barings. "Just like Russia showed the world a
former superpower could default, Ecuador could show
its neighbors that avoiding a moratorium is not sacred."
As problems in Ecuador prompted some investors to
trim their exposure to Brazil, growing concern over the
ability of President Fernando Henrique Cardoso's
administration to control spending triggered additional
anxiety. There have been several examples in recent
days of pressure on government finances.
This week, thousands of farmers marched on Brazil's
capital city, Brasilia, to call for a restructuring of about
11 billion reais, or $5.7 billion, in debt with
state-controlled financial institutions. Although
Cardoso refused to accede to their demands, Congress
overwhelmingly showed support for the farmers. And it
is in Congress that the president hopes to win approval
for austerity measures to prevent a worsening of the
At the same time, members of Congress began
considering raises for themselves. If the raises are
approved, cries for similar pay increases could
cascade throughout the civil service. Worries that the
central government may assume some debt obligations
of state administrations contributed to the gloom over
the its effectiveness in dealing with these challenges.
"Brazil did a very good job handling the economy in the
first half of the year, but the challenge now is political
rather than economic," said Carlos Novis Guimaraes,
the head of investment banking for Latin America at
Some indicators show an improvement in the economy,
among them rising direct foreign investment, which
climbed 64 percent, to $17.1 billion, in the first half of
this year. Such inflows of long-term capital helped fuel
the second consecutive quarter of economic growth.
Yet concern over the deficit or over problems in
neighboring countries could keep the central bank from
lowering interest rates, now at 19.5 percent. That
possibility adds to anxiety over the effect that such
rates have on public finances, because the government
needs to pay higher premiums on its bonds to attract
"Latin America is hurt by these momentary spikes of
concern," said Thomas Trebat, an economist with
Salomon Smith Barney. "But really, what we see after
taking a deep breath is a region that's lagging the rest of
the world into recovery. Problems that put a chill on
capital flows now will be forgotten by next year."
Accord in Ecuador Can't Hide Woes
By LARRY ROHTER
UITO, Ecuador -- For the moment, the streets are quiet again and no one except an exiled
former president is demanding that the current head of state, Jamil Mahuad, step down. But
even after cobbling together an accord that ended two weeks of strikes and political turmoil,
Ecuador remains as divided and economically vulnerable as ever.
As many Ecuadoreans see it, the agreement Mahuad announced Thursday, ending the state of
emergency he had declared a week earlier and rolling back the price of gasoline in exchange for
pledges of opposition support for other austerity measures, is little more than a Band-Aid. They fully
expect that within a short time their nation of 12 million will again be in disarray, and they point to
recent history as proof.
"Everything in the politics of this country is about short-term management," said Fernando Carrion,
director of the Ecuador branch of the Latin American Faculty for Social Sciences, a regional
research and analysis group. "But our real problems are structural, long-term problems, and we are
no closer to a solution to any of those."
Even when it was under military rule in the 1970s, Ecuador was largely spared the political
violence and repression so common elsewhere in South America at the time. But since the return of
civilian democratic rule 20 years ago, one presidency after another has dissipated its strength and
support in quarrels with a powerful, recalcitrant and fragmented Congress.
Indeed, the latest political configuration does little to resolve the country's economic woes, which
Mahuad describes as the worst since the Great Depression. Inflation, at 43 percent, the highest in
Latin America, is expected to rise once Congress approves the austerity package. The national
currency, the sucre, which has lost 40 percent of its value against the dollar this year, remains
In addition, thanks to spendthrift policies of previous governments, Ecuador will have to make debt
payments of $2.6 billion to foreign creditors, and is expected to borrow $1.8 billion more. "Our
problem in the recent past has been that we think we are living in Miami and not the Andes," said
Alberto Acosta, a prominent economic analyst here.
By most measurements, no one emerges from the recent turmoil a winner, with the possible
exception of former President Abdala Bucaram, who was removed from office in 1997 for mental
instability and is waiting in the wings in Panama for an excuse to return to power.
Mahuad's popularity and authority have both been weakened by the crisis, and the political infighting
has left the country's international image and credit rating in tatters.
"What kind of country changes presidents every six months?" asked Osvaldo Hurtado, a former
president, referring to the three heads of state in little more than two years. "How can a country with
this level of instability be taken seriously by the United States, Europe and the international lending
With unions and Indian groups taking to the streets and opposition parties clamoring for Mahuad's
head, the political structure came very close to breaking down, according to diplomats here.
At one point, said Leslie Alexander, the American ambassador to Ecuador, the government even
discussed carrying out a "self-coup," as President Alberto Fujimori of Peru did in 1992, but "there
were enough level-headed people to know it is not practical."
In an interview, Vladimiro Alvarez Grau, the interior minister, said that "at no moment did the
government analyze this possibility" since "we have always counted on the constitutional vocation of
the armed forces and the police for support."
The only reason Mahuad declared a state of emergency on March 9, he added, was "to be able to
have the juridical instruments to permit control of internal order and public security."
Nevertheless, the crisis has widened the old fissure between the capital here, high in the Andes, and
Guayaquil, the freewheeling Pacific Coast port that is the main business center. In a warning
Wednesday to civilian leaders to behave more responsibly, the military senior command specifically
singled out "regionalism" as a destructive force.
But Mahuad had no sooner announced an end to the impasse paralyzing the country than Leon Febres
Cordero, a former president who is now mayor of Guayaquil, rejected the arrangement in language
intended to arouse regionalist passions. He described Mahuad's austerity plan as "collusion against
Guayaquil and the coast" and called for a popular uprising against the central government.
Adrian Bonilla, a political science professor, argues that Mahuad's one notable success since taking
office last August -- bringing an end to decades of hostilities with neighboring Peru -- has,
ironically, helped to heighten domestic tensions within this small country that, though not a threat to
its existence as a state, are nonetheless disruptive.
"The border issue has lost relevance, and so national unity around this question loses force and
regional identities strengthen," he said.
But Hurtado maintains that the upsurge in regional squabbling masks the country's most fundamental
problem, which is the virtual collapse of its banking sector in recent months. Most of the biggest
banks are in Guayaquil, and the government has been under enormous pressure from Febres
Cordero's dominant Social Christian Party to rescue them, no matter the cost.
"Regionalism has always existed since Ecuador was constituted as a republic, but it has grown as a
result of the banking crisis," Hurtado said in an interview here. "The banks have wrapped
themselves in the flag of Guayaquil to prevent their balance sheets from being read objectively and
to prevent the insolvent banks from being shut down."
By most calculations, the government has spent nearly $1 billion bailing out ailing banks with strong
political connections, a sum that is larger than this year's projected budget deficit and almost as large
as the country's reserves. With their own savings accounts frozen for up to a year by Mahuad's
austerity plan, average Ecuadoreans are irate at what they see as preferential treatment given to the
rich and powerful.
"It's not fair," said Ramon Molina, a 62-year-old bus driver, as he stood in line outside a bank last
week, waiting to withdraw the 50 percent maximum from his account that is permitted by decree.
"It's our money, and the president has taken it away from us without our permission so that he can
turn around and give it to people who don't deserve it."
The costly bank bailout also complicates negotiations with the International Monetary Fund for a
$430 million rescue package that the country sorely needs in order to reduce its unfavorable trade
balance and attract foreign investors.
Though recent increases in the price of oil have given Mahuad a bit of a cushion, even with the
political accord announced last week a budget deficit of more than $600 million is expected for this
In a speech Tuesday, Michel Camdessus, managing director of the IMF, warned that "there will not
be help from the rest of the world if there is not unity within the country." He added, "There is only
one thing holding us back, the fact that there is no unity in Ecuador behind an emergency program."
WORLD ECONOMY AND FINANCE 10 LATIN AMERICA: Turbulence leaves its mark:
LATIN AMERICA by Richard Lapper, Latin America Editor: Five of the seven biggest
economies - Argentina, Colombia, Venezuela and Chile, as well as Brazil - will
decline, with production expected to fall on average by 0.5 per cent
79% match; Financial Times ; 24-Sep-1999 02:15:34 am ; 1050 words
The financial turbulence that has swept through world markets in the past two years has left
its mark on many parts of Latin America, underscoring the region's traditional dependence on
foreign capital and highlighting structural weaknesses. Even though Brazil has recovered at a
faster rate than many policymakers and investors thought possible after it devalued its
currency in January, much of the rest of the region has been plunged into deep recession,
with contraction more severe than had been envisaged at the start of the year.
Five of Latin America's seven biggest economies - Argentina, Colombia, Venezuela and Chile,
as well as Brazil - will decline, with production across the region expected to fall on average
by 0.5 per cent. "In the long run, the impact of the crisis in the region has been much more
profound than analysts initially predicted," says Jose Antonio Ocampo, executive secretary
of the United Nations Economic Commission for Latin America and the Caribbean.
In some ways, Latin America's difficulties seem surprising. Oil and copper prices have risen
and with relative calm returning to financial markets most governments have been able to
reduce interest rates.
Overseas companies have pushed ahead with investment plans. By the end of July, Brazil
had attracted this year more than Dollars 18bn in foreign direct investment, for example. In
Mexico, international companies have been investing there at the rate of nearly Dollars 1bn
every month, attracted by the country's growing integration with US economy following trade
liberalisation. Overall, the continent looks set to see inflows rise to levels roughly comparable
with the Dollars 50.5bn achieved in 1997 and the Dollars 49.4bn in 1998.
However, at the same time the prices of soft commodities such as coffee and soya remain
depressed. More importantly, there has been a sharp decline this year in portfolio investment.
The euphoria that accompanied Brazil's initial recovery from its January financial crisis has
dissipated quickly. US pension funds and insurance companies have yet to regain their
appetite for Latin American risk.
Inflows of capital into stock markets have dried up. There has been a dearth of new bond
and equity issues. The yields on Latin American bonds have fallen since January but the
spread over US Treasury bonds - the benchmark used by investors to assess risk - is still
hovering around the 10 per cent mark for Brazil and Venezuela and between 6 and 7.5 per
cent for Peru, Mexico, Argentina and Colombia, making anything but short-term issuance
prohibitively expensive for most borrowers.
Repayments on bank loans now exceed flows of new loans into the region. "Multinationals
still believe in Latin America," says Francis Freisinger, manager Latin American economics at
Merrill Lynch, the US investment bank. "But other investors are not so sure. Confidence has
really suffered in the asset class."
According to the Institute for International Finance capital inflows into the region have
dropped from Dollars 105.9bn in 1997 to Dollars 83.1bn in 1998 and to an expected Dollars
51.5bn in 1999. With capital restricted, most countries have been forced to cut back on
imports. Mainly because of falling imports, Latin America's current account deficit will drop to
Dollars 60.4bn in 1999, compared with Dollars 85.8bn in 1998, according to London- based
Latin America Consensus Forecasts.
For Argentina, Uruguay and Paraguay this scenario is further complicated by the impact of
Brazil's devaluation. Brazil itself has been able to recover faster because the devaluation of
the real has had only a limited impact on inflation.
Businesses have proved to be more resilient and competitive than had been expected and
sluggish domestic demand has exerted downward pressure on prices, allowing the
government to reduce interest rates at a relatively rapid pace. The economy is expected to
contract this year by less than 1 percentage point, compared to forecasts of a 3 per cent
contraction only a few months ago.
By contrast, Argentina is struggling under the competitive impact of the real devaluation by
Brazil. With its own currency tied to the appreciating dollar at a one to one rate under the
country's currency board system, industrialists are at a significant competitive disadvantage.
Industrial production fell by 14.2 per cent in the 12 months to June. In July, Argentina
introduced tariffs and quotas on Brazilian car imports. Uruguay and Paraguay, the two other
Mercosur members, are also faced with deeper contraction.
Some analysts argue that Latin America has already fallen to its lowest point and that a
gradual recovery should become evident next year, as lower interest rates and higher
commodity prices take effect. However, a number of political worries temper any optimism.
Popular fatigue with the social costs of more than a decade of economic adjustment is
leading to opposition to further fiscal austerity and to demands for debt write-offs in a
number of countries.
Last year, Venezuela elected a radical populist, Hugo Chavez, to be its new president and
although he has paid lip service to orthodox market-oriented policies, the government's fiscal
control has been loose and its relationship with the local private sector poor. Private sector
investment has fallen sharply and despite an increase in government spending, the economy
is expected to contract by as much as 8 per cent this year. Unemployment has risen by 6
percentage points during the past year.
Populist opposition politicians are frustrating liberal reform plans elsewhere. In Ecuador, for
example, Social Christian politicians look set to precipitate Latin America's first default on
Brady bonds by opposing President Jamil Mahuad's economic adjustment programme. More
seriously, in Brazil, President Fernando Henrique Cardoso's plans to meet fiscal targets
agreed with the IMF as part of last year's Dollars 41.5bn rescue package could be at risk if
the opposition in congress succeeds in blocking his plans to reduce public spending on
pensions and introduce tax reforms.
And with populist political discourse increasingly evident in the election campaigns of
Argentina and Mexico, Latin America's hard won macro-economic stability could well face
further tests. The danger is that these increased political risks will limit the continent's ability
to attract the capital it needs to resume growth, let alone achieve the higher rates of
expansion it needs to meet pressing social needs.
LETTERS TO THE EDITOR: Mind-boggling stance over Ecuador
97% match; Financial Times ; 24-Sep-1999 02:14:40 am ; 338 words
From Mr Arturo C. Porzecanski.
Sir, Your two articles on the debt crisis in Ecuador and the wider implications of the G7/IMF
stance ("Dilemmas of default" and Lex note "Burden sharing", September 20) missed the main
facts of this precedent- setting case: the first-ever default on a Brady bond.
First, foreign commercial banks and private investors have not poured funds recklessly into
Ecuador during the past few years; nor did they pull any meaningful amount of money out of
the country earlier this year. This is confirmed by the available data compiled by both the
Central Bank of Ecuador and the Bank of International Settlements. So, if the G7/IMF are trying
to penalise investors and commercial banks in the Organisation for Economic Co-operation
and Development area for behaving irresponsibly, then they have picked innocent victims.
Second, several years ago, as part of the Brady debt restructuring process, private creditors
agreed to forgive 45 per cent of all principal falling due and accept payment for the remainder
in 30 years; or else to grant equivalent, permanent debt relief in the form of 30-year bonds
paying a concessional interest rate of as little as 3 per cent a year (currently 4 per cent). In
sharp contrast, the OECD export credit and foreign aid agencies represented by the Paris
Club, and the Washington-based multilateral agencies, granted no comparable treatment: they
merely postponed obligations falling due.
This is why the payment of interest on these Brady bonds represents less than one-fourth of
the Ecuadorian government's total external debt service. Foreign bondholders are not a
cause of Ecuador's problems; lack of realistic generosity on the part of OECD governments
It thus boggles the mind to see that the G7/IMF are encouraging Ecuador to seek debt relief
from private creditors for the second time, as a way of "bailing them in", when in fact it is the
official community that has been bailing itself out.
Arturo C. Porzecanski, Americas chief economist, ING Barings, 55 East 52nd Street, New
York, NY 10055, US
Specific terms of the bonds
Commentary on Ecuador
Brady bond analysis