VZCZCXYZ0001
RR RUEHWEB

DE RUEHQT #0510/01 1761316
ZNR UUUUU ZZH
R 251316Z JUN 09
FM AMEMBASSY QUITO
TO RUEHC/SECSTATE WASHDC 0533
INFO RUEHBO/AMEMBASSY BOGOTA 8227
RUEHCV/AMEMBASSY CARACAS 3609
RUEHLP/AMEMBASSY LA PAZ JUN LIMA 3280
RUEHGL/AMCONSUL GUAYAQUIL 4435
RUEATRS/DEPT OF TREASURY WASHDC

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