This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS QUITO 002836 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EINV EC
SUBJECT: ECUADOR RE-ENTERS BOND MARKET 
 
¶1.  Summary.  Ecuador successfully placed about $650 million 
in bonds on December 7, marking its first return to the 
private international finance market since its 1999 default. 
According to Minister of Economy and Finance Magdalena 
Barreiro, Ecuador will use the proceeds to buy back higher 
priced debt, with a potential savings of $120 million over 
the next 10 years.  Venezuela, which originally said it would 
purchase about $300 million of the bonds, ended up with only 
about $25 million.  Ecuador, with the recent appointment of a 
new Central Bank Board is also closer to receiving a $400 
million loan from the FLAR.  As a result, analysts are saying 
that Ecuador could be over-financed by as much as $500 
million in 2006. End Summary. 
 
Back in the Market 
------------------ 
 
¶2.  Ecuador tried to return to the international debt market 
last April, but stopped those efforts when former President 
Gutierrez was removed from office.  That would have marked 
Ecuador's first return to the international debt markets 
after its 1999 default.  President Palacio's first Economy 
Minister (and now presidential candidate) Rafael Correa 
halted the effort.  Correa's tenure was short-lived. 
International financial markets welcomed his replacement, 
Magdalena Barreiro, and the marked change in direction from 
Correa's statist economic policies to more sustainable ones. 
 
¶3.  Demand was strong for the bond offer on December 7.  The 
10 year bonds offered a yield of 10.75% (9.375% coupon).  Of 
the approximately $1.5 billion booked, Ecuador sold $650 
million worth of bonds. Venezuela, which originally touted it 
would purchase $300 million of the bonds, purchased only 
about $25 million. 
 
More Financing on its Way 
------------------------- 
 
¶4.  Congress recently approved a new board of directors for 
the Central Bank Board.  Most believe this was the last 
remaining hurdle for Ecuador to receive a $400 million loan 
from the Latin America Reserve Fund (FLAR).  Ecuador will use 
the FLAR funds and the 2015 bond proceeds to buy back some of 
its outstanding 2012 bonds (which have a 12% interest rate) 
and local treasury notes (CETES).  Barreiro estimates that 
the buybacks of some of the 2012 bonds and CETES could save 
Ecuador $120 million in interest costs over the next 10 years. 
 
Over-financed in 2006? 
---------------------- 
 
¶5. Financial analysts at Credit Suisse First Boston (CSFB) 
estimate that Ecuador could be over financed by as much as 
$500 million in 2006.  There are, however, certain risks that 
must be considered.  CFSB reports that for every $1/barrel 
decline in oil prices, government revenues fall by $30 
million on an annualized basis.  Thus, a notable decline in 
oil prices could drastically effect the fiscal situation. 
There have been, and will continue to be in the 2006 election 
season, pressure on the GOE to spend more on social and other 
development projects, adding more fiscal pressure.  The 
government continues to subsidize the energy sector and might 
have to spend hundreds of millions more to finance 
investments in the electricity generation and distribution 
over the next several years to avoid energy shortages. 
 
Comment 
------- 
 
¶6.  Ecuador's return to the international debt market and 
eventual FLAR loan should ease some of the fiscal pressure on 
the GOE, at least in 2006.  Still, new financing sources do 
not address the fundamental problems of political instability 
and poor investment conditions in the country.  Eventually, 
Ecuador will have to address these problems, and hopefully it 
will do so before cyclical factors such as a decline in oil 
prices or demand for emerging market debt recur. 
JEWELL