MORE LESSONS FROM ECUADOR ON DEFAULTING, FOR BELIZE

MORE LESSONS FROM ECUADOR ON DEFAULTING, FOR BELIZE.


But the most relevant Latin American episode is more recent and less well known: Ecuador 2008, perhaps the first opportunistic default (that is, one triggered by unwillingness rather than inability to pay) in modern economic history. A widely foretold affair (debt repudiation was part of President Rafael Correa´s 2006 presidential platform), Ecuador used the default threat to depress bond prices in the secondary market, only to buy them back at bargain prices through the back door. The task was outsourced to Banco del Pacifico, which purchased the soon-to-be-defaulted Ecuadorian paper at prices above 20 cents on the dollar. When, after default was declared in December 2008, Ecuador launched an inverse auction for the defaulted papers, with the outstanding debt largely in friendly hands and the remaining bondholders forced to liquidate their positions to meet the massive post-Lehman Brothers withdrawals, the operation was a stunning success.

For the European case, Ecuador offers an obvious lesson: the crucial part played by the imminence of a default. Indeed, almost two years toying with the a potential default (which included a much publicized commission to evaluate the “legality” of the bonds, along the lines of the odious debt arguments) were not enough to induce a deep discount: Correa needed to move all the way to a credit event in December 2008 to purchase the bonds at fire sale prices. Panic (both due to Ecuador´s default and to the global crisis) was key for the success of the buyback.