Arming for an Ecuador Default

Apr 1, 2007

Bondholders should lawyer up, locate the assets and consider a pre-emptive strike against Ecuador in the run up to default. The sovereign is steeling itself for a legal fight. by Kenneth S. Levine*

US litigation from the Argentina default and from many other nations has left a favorable path of legal precedents that Ecuador's bondholders could follow to recover their investments. It also provides guidance for what bondholders should be doing now to prepare for what appears to be an inevitable default.

In January 2007, Rafael Correa took over as president of Ecuador, and vowed to default on the country's "illegitimate" foreign debt, which currently stands at over $10 billion. On February 15, the president faced his first test – a $135 million bond interest payment – but backed down at the last minute and paid on time. Correa's government has also said it will make a May interest payment, but it is making no promises for the long term. Analysts predict Ecuador will default within the next year.

If this happens, Ecuador will follow in the footsteps of a number of...

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