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

debt crisis.

``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


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

Venezuela lately."

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

international aid.


August 21, 1999


South American Markets Come

Under Pressure


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

juggernaut, Brazil.

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

budget deficit.

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

Lehman Brothers.

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


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


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