Ecuador Bonds Jump to Highest Level Since July Amid IMF Talks

  • IMF says Ecuador has requested assistance after earthquake
  • Government's past criticism may be obstacle to bigger deal

Ecuador’s benchmark bonds rallied to their highest levels since July after the nation’s talks with the International Monetary Fund boosted speculation the Washington-based lender will help the cash-strapped country dig itself out of a punishing recession.

The IMF said Wednesday that the government had requested assistance, without providing more details. The country’s $2 billion of bonds due in 2024 jumped 2.2 cents to 86.1 cents on the dollar at 2:30 p.m. in New York, pushing yields down 0.46 percentage point to 10.5 percent. Ecuador’s $1.5 billion of notes due in 2020 surged 3.25 cents to 94 cents.

Ecuador is looking to raise funds after a 7.8-magnitude earthquake struck April 16, killing more than 650 people and destroying large swaths of the South American country’s northern coast. Even before the temblor, which the government says may cut economic growth by 3 percentage points, the IMF had forecast a 4.5 percent contraction this year as falling crude prices hobbled the OPEC nation’s economy. 

The IMF didn’t specify the exact nature of Ecuador’s request, and the Finance Ministry’s press office didn’t respond to a call and e-mail seeking comment. The IMF talks may lead to assistance that would help plug the nation’s financing gap and compel the nation to follow the fund’s guidelines on economic management, said Edwin Gutierrez, the head of emerging-market sovereign debt at Aberdeen Asset Management Plc.

“People are excited because they think it could lead to a request for a real IMF loan,” Gutierrez, who helps oversee about $11 billion, including Ecuadorean bonds, said in an interview from London. “It would help plug their financing gap.”

With one of the world’s most dangerous volcanoes threatening the capital city of Quito, the El Nino weather phenomenon causing deadly floods along the coast and now the worst earthquake in decades, President Rafael Correa is coming under increasing criticism from political opposition figures including Guillermo Lasso, who ran against Correa in the 2013 presidential elections, for spending the nation’s profits from years of booming oil prices without saving for emergencies.  

The 53-year-old former economics professor has said his policy of using emergency credit lines to pay for natural disasters is better than creating reserve funds that don’t generate significant financial returns.

Correa is a frequent critic of IMF policies, which he blames in part for the collapse of Ecuador’s financial system in the late 1990s. After Correa took power in 2007, he paid off the country’s debt with the fund and broke off normal relations. Now, Correa’s past criticism raises the political cost of seeking aid ahead of presidential elections in 2017, said Eurasia Group analyst Risa Grais-Targow. Correa, who is barred from seeking another term, has called on voters to support the candidate from his Alianza Pais political party.

“Even if Correa is able to avoid a program this year, the next government will inherit a very difficult economic situation that will necessitate a broader program, regardless of who wins,” Grais-Targow said Thursday in a research note to clients. 

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