Ecuador has reached a provisional restructuring deal with the holders of about half of its sovereign bonds, which, if formally approved, would give the country crucial breathing space as it tries to sort out its finances and deal with coronavirus.
The announcement comes as Argentina seeks a similar, although much larger, deal with its bondholders under more challenging conditions.
It also comes as Ecuador discusses further financing with the IMF and Chinese banks. The IMF welcomed Monday’s announcement, and the government in Quito said it hoped it could clinch a deal with the fund by mid-August.
Ecuador is labouring under $58.4bn of total debt — more than half of annual gross domestic product. Almost a third, $17.4bn, is owed to bondholders.
Monday’s deal would give it partial debt relief on $10bn over the next four years and a further $6bn between 2025 and 2030.
The deal envisages bondholders accepting a haircut of 9 per cent on capital repayments, saving Ecuador over $1.5bn.
The country would have much longer to pay off its debt. It would not be expected to make capital payments until 2026 or pay anything this year and would only be obliged to make modest interest payments of $79m next year. Some of its obligations would be pushed back to 2040.
Richard Martínez, Ecuador’s finance minister, told a news conference the deal was reward for Ecuador’s responsible action in March when it paid bondholders $341m as many critics argued it should default and use the money to tackle coronavirus instead.
“No one invests in a country that doesn’t meet its obligations,” the minister said.
The government described the bondholders that had agreed to the deal as “substantial international investors”, including funds managed or advised by Ashmore, BlackRock and AllianceBernstein.
Ecuador will now press ahead with a consent solicitation in the hope the creditors formally accept it. It would need a two-thirds majority in the case of most of the bonds and a three-quarters majority in the case of one that is due to mature in 2024.
One bondholder, speaking to the Financial Times on condition of anonymity, warned that if the government pushed ahead with only some creditors, talks with the others could turn “unnecessarily hostile”.
The country’s bond maturing in 2028 rose to 51 cents on the dollar on Monday, up from a low of 20 cents on the dollar reached in March.
While Monday’s announcement gives the government some breathing space, it does not involve any new cash. For that, Ecuador is looking to the IMF and Chinese banks.
The county had a $4.2bn IMF lending programme in place until early this year, but the pandemic and a sharp drop in oil prices meant it could no longer meet its demands. Both sides agreed to scrap the agreement and try for a new one.
Ecuador is one of the poorest countries in South America and the only one that uses the dollar as its official currency, limiting it in what it can do to tackle its financial problems.
It has also been one of the countries worst hit by coronavirus, particularly in March and April in the port city of Guayaquil.
The Andean nation faces presidential elections early next year. Incumbent Lenín Moreno has said he would not stand. A candidate representing the interests of the country’s former leftwing president Rafael Correa is almost certain to run.