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Ecuador offers to buy back public bonds at 70% discount

by News Agencies

21 April 2009

Ecuador has offered to buy back up to $3.2 billion in defaulted bonds at a large discount in a move that reinforces President Rafael Correa popular tough stance on debt ahead of a presidential election on Sunday.

Finance Minister Elsa Viteri said on Monday Ecuador was offering 30 cents per dollar in a process that would involve a "modified Dutch auction."

She did not spell out the terms of the modified Dutch auction. In a standard Dutch auction, the lot for sale is offered at an initial price, which if there are no takers, is then reduced until there is a bid.

The Andean nation will begin receiving bids on May 15, with decisions on the bids likely to be made by May 26.

Here are some possible investor responses to Ecuador’s plan to rework the defaulted bonds:

* MAJORITY APPROVAL: A worsening global economy and low risk tolerance could push investors to accept the offer even if it means taking some losses. The threat of years of tough negotiations or even litigation could prompt a majority to take what they can now instead of losing more time and money.

Low oil prices would also make it harder for investors to squeeze any payments from the OPEC nation via international law suits. Analysts say Ecuadorean paper is only a small part of most emerging market portfolios, which means taking a large discount will not mean heavy losses for any individual bank.

But settling the default would probably take months of negotiations even if most debt holders are favorable to it.

* PROTRACTED BATTLE: Bondholders could take a more aggressive approach and seek repayment via international lawsuits that would probably take years to conclude.

Many investors are riled that Ecuador decided to default based on moral grounds and not on capability to make payments. Bond holders are contemplating forming a group to negotiate the defaulted debt, in the first sign of what could be a united front of investors to pressure Ecuador.

Investors could decide to make Ecuador an example for other emerging market countries struggling to repay debt amid the global crisis. The suits could result in the takeover or freeze of Ecuador’s crude exports, oil fuel imports or cash reserves held abroad.

* HOLDOUTS, LATENT RISK: A minority of "holdouts" could refuse to accept new terms and instead seeking repayment via asset seizures.

Even if most investors take Ecuador’s offer, the holdouts could prove to be a risk for the country’s feeble economy already starved of fresh capital.

Years after its massive default, Argentina continues to feel the pinch of holdouts freezing some of its assets abroad or blocking new international loans. Distressed asset investors, sometimes called "vulture" funds, specialize in time-consuming litigation to seek default payments.

"Its like a mosquito going after you. It could turn out to be an unbearable nuisance," said Bulltick Capital Markets’ Alberto Bernal. It may be even riskier for Ecuador. An asset freeze could further curb dollar income, a key consideration for Ecuador which uses the dollar as its currency.

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