id:

213930

date:

6/25/2009 13:16

refid:

09QUITO510

origin:

Embassy Quito

classification:

UNCLASSIFIED//FOR OFFICIAL USE ONLY

destination:

09QUITO277

header:

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INFO RUEHBO/AMEMBASSY BOGOTA 8227

RUEHCV/AMEMBASSY CARACAS 3609

RUEHLP/AMEMBASSY LA PAZ JUN LIMA 3280

RUEHGL/AMCONSUL GUAYAQUIL 4435

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----------------- header ends ----------------

UNCLAS QUITO 000510 

SENSITIVE 

SIPDIS 

E.O. 12958: N/A 

TAGS: ECON, EFIN, EC 

SUBJECT:  ECUADOR ANNOUNCES BOND BUYBACK "A SUCCESS" 

Reftel:  Quito 277 

1. (SBU) Summary:  On June 11, Ecuador's Minister of Finance 

presented the results of the GOE's bond repurchase, which resulted 

in the repurchase of 91% of the country's 2010 and 2030 Global bonds 

at a 65-70% discount.  Although President Correa called the 

repurchase a success, some critics questioned the use of Ecuador's 

scarce liquidity for the buyback.  End Summary. 

2. (U) On June 11, Finance Minister Elsa Viteri announced that the 

GOE successfully bought back $2.9 billion (91%) of the country's 

2012 and 2030 Global bonds at a 65-70% discount.  The buyback took 

place through a modified Dutch auction process, based on a proposal 

initially presented to bondholders on April 20 (reftel).  (Note:  Of 

Ecuador's three outstanding bond issuances (2012, 2015, and 2030), 

the 2012 and 2030 were restructurings of previous debt and declared 

illegitimate by the GOE.)  Viteri remarked that the government had 

not used any internal or foreign debt resources to finance the 

operation, which she termed "legitimate, legal and transparent." 

She claimed the repurchase represented savings on debt service of 

$7.5 billion through the year 2030 or $30 million per month, which 

would be used instead to finance social programs, education, and 

production.  President Correa echoed her remarks, commenting that 

his government had done what other governments had been afraid to 

do. 

Market Manipulation? 

-------------------- 

3. (SBU) The repurchase of $2.9 billion worth of 2012 and 2030 bonds 

at a price of 35 cents on the dollar would represent a disbursement 

of about $1 billion.  However, according to official figures, 

government reserves showed a drop of only $243 million between May 

22 and May 29, the time the bond repurchase went through.  This 

amount is much less than would be needed to repurchase the bonds, 

and lends credence to the widely held belief that the GOE 

repurchased some of the bonds previously in December 2008, following 

its report that the debt was illegitimate.  An earlier purchase 

could have given the GOE an advantage by possibly reducing the 

number of remaining bondholders and their influence.  Contacts from 

the Central Bank confirmed privately that the amount disbursed for 

the bond repurchase on May 29 was only $305 million. 

Effect on Public Finances 

------------------------- 

4. (SBU) Fiscal balances have fallen dramatically following the 

repurchase disbursement, as the GOE has not only used its available 

liquidity to finance the debt repurchase, but has maintained its 

projected pattern of current expenditures.  Despite the recent 

increase in oil prices, of Ecuador's $2.5 billion in international 

reserves, only $300 million, about a month of nonfinancial public 

sector expenditures, belong to the Treasury.  The rest belong to 

Social Security, other government entities, and private banks' legal 

reserves.  Minister Viteri has made assurances that in the coming 

months fiscal balances will improve due to expected loans totaling $ 

1.5 billion from regional financial institutions including the IDB, 

the CAF and the FLAR.  However, most of the expected loans are 

linked to projects so are not really liquid resources. 

Outstanding Debt 

---------------- 

5. (U) Approximately 19% of the 2012 and 7% of the 2030 bonds remain 

in the market, for a total of about $289 million.  On June 17, 

Minister Viteri reported that the GOE had initiated contact with 

Italian entities who the GOE believes hold the majority of the 

outstanding bonds.  Viteri announced that bondholders who had been 

unable to participate in the buyback for regulatory reasons would 

still be able to sell their bonds for the 35-cent price, but that 

for others, the price would be lower than 35 cents. 

6. (SBU) As a result of the repurchase, overall Ecuadorian foreign 

debt has fallen by 29%, to about $ 7.1 billion.  Outstanding debt 

includes, in addition to $ 1.2 billion in commercial debt, $ 4.3 

billion in multilateral debt (including debt from the CAF, IDB, and 

World Bank), and $ 1.4 billion in bilateral debt from different 

countries such as Brazil and Spain.  In an interview on June 12, 

President Correa stated that Ecuador would be reviewing the 

legitimacy of multilateral loans and loans from other governments in 

the coming months.  He claimed that loans from entities such as the 

World Bank involved "criminal acts by previous governments." 

However, Minister Viteri then announced that Ecuador would continue 

to try to reduce its debt load through dialogue, as part of its 

desire for "a positive and balanced relationship with the 

international financial community," apparently trying to moderate 

what the President had said. 

7. (SBU) Comment:  The GOE seems to have succeeded in its debt 

repurchase, although analysts believe fiscal cash flow management 

will be a problem in 2010.  Market manipulation may still be an 

issue, although with most bondholders having already cashed in, 

there does not appear to be many left to call for charges.  The big 

question will be whether the default will have a significant impact 

on access to credit in the longer term.  End Comment. 

HODGES 

=======================CABLE ENDS============================