Political turmoil likely to swamp Ecuador bond swap, sources say

By Paul A. Harris

St. Louis, April 20 - With political turmoil exploding Wednesday Ecuador's congress moved to oust president Lucio Gutierrez, the country's chances of realizing a substantial savings in interest expenses via a bond exchange appear to be flickering out, according to market sources.

Prior to the sell-off in the emerging markets, Ecuador was heard to be poised to launch a global bond due 2012 that would bear an interest rate lower than its existing 12% bond due 2012.

According to a market source, the Ecuador global 12% due 2012 was seen down 3.64 early Wednesday afternoon in response to reports that police action against street protesters in Quito had resulted in at least one protester being killed. A source spotted the bond with a very wide bid-offer range - 97.69 bid, 101.38 offered - resulting in a 12.46% yield.

The 2012 bond plunged further after Canal Uno Televison reported that congress voted to sack president Gutierrez. At the close of the session, the 2012 bond was down 4¼ points to 96¼ bid.

Enrique Alvarez, Latin America debt strategist for IDEAglobal, told Prospect News on Wednesday that the current political situation has likely ratcheted the risk up too high for the exchange deal to get done.

"I don't think Ecuador has a chance of attempting a swap going forward," Alvarez said. "The domestic situation is quite unstable.

"The extreme degree of uncertainty regarding governability places Ecuador well outside tolerable risk limits for an exchange."

Meanwhile an investor, speaking on background, told Prospect News that opposition in Congress outnumbered president Gutierrez.

"Early this year the president completely changed the supreme court judges," the investor said.

"Then he allowed two of the former presidents, who had sought asylum in Central America, to come back to Ecuador. One of them is Abdala Bucaram, an extreme, radical president who had lasted about a year.

"The reason Gutierrez did this is because he needed a little bit of support from the opposition. And the only way they would support him was if he allowed the former president back in the country. That created a lot of discontent among the population, but also among the other political parties in the opposition.

"The president's own party controls only a very small fraction of the congress," the investor added. "So he certainly needs to negotiate with the other parties, which he has been doing since he came to office.

"He has been going back and forth trying to build coalitions. But in order to build them he had needed to do something to appease each particular party.

"It has been just crazy on that front."

The buyside source went on to explain that before becoming president himself, Gutierrez, an ex-colonel in the army, was an aide to the controversial Bucaram. Bucaram's Roldosista Party had backed Gutierrez's effort to replace the supreme court. The opposition has accused Gutierrez of gerrymandering the judicial branch of the government in order to exonerate the formerly exiled Bucaram in return for his political support.

"Last weekend Gutierrez again decided to fire all of the members of the supreme court because there was such a large discontent in the population that he wanted to start from zero again," the investor added.

"It's very hard for me to think that the bond exchange will happen, given these circumstances. I don't think the market is going to have any appetite for an exchange right now, with such big uncertainty on the political side.

"And of course with regard to the present conditions in emerging markets the timing is not the best."

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