Ecuador today announced that it would up its haircut offer on the Global 12s and 30s bonds and pay 35c on the dollar instead of its baseline 30c

TO BE NOTED: From Inca Kola News:

"5/26/09

Studmuffin pays 35%

Ecuador today announced that it would up its haircut offer on the Global 12s and 30s bonds and pay 35c on the dollar instead of its baseline 30c, the news coming after FinMin Viteri had done tea'n'buns with major holders in London and Paris. The press release in English is on this link right here so go look for yourself.

If you're going to accept the offer you have until June 3rd to deposit your bonds. The big question now is how many holdouts there will be, as the 5% gravy added today (largesse thanks to the recent pop in the price of crude more than a long-term cunning plan, I'd wager) is clearly designed to sway the fence sitters over the The Way Of The Muffin. The number being bandied about Quito today is 90% and if they really get that many the daring holdouts will be left with a long, long wait.

Telling you now, I doff my cap to Studmuffin on this one. If he pulls this off and retires all this debt at a 2/3rds haircut without getting bogged down á la Argentine in the New York courtrooms (as is now likely) he'll have done a great favour to his country going forward. I had my serious doubts all the way through this but I'll be happy to eat humble pie.

PS: Here's a Bloomie report on the 35% news and here's Felix Salmon with his take."

"Date: 26 May 2009
Clearing Priee for the 2012 Bonds and 2030 Bonds and Opportunity for Holders who
submitted Offers above the Clearing Priee to revise their Offers to a priee equal to the
Clearing Priee
The Republic is pleased ta announce the Clearing Priees for Bonds accepted for purchase
pursuant ta the Invitation made on 20 April 2009. The 2012 Bonds Clearing Priee is $350 and
the 2030 Bonds Clearing Priee is $350 (in eacb case this is expressed as a priee per $1,000
face amount). As holders are aware, as a result of the prepayment of $740m made in March
2006, there is a pool factor of 0.408 applicable ta the 2012 Bonds and this will be applied
against the original $1,000 faee amount of these Bonds ta ensure that a priee of 35c on the
dollar is paid in respect of the current outstanding face amounts of the se Bonds accepted in the
Invitation. The Clearing Priees for the Bonds reflect the resources of the Republic and are
responsive to the majority of the Offers received.
The Republichas decided ta provide Raiders who submitted Competitive Offers relating to a
Series of Bonds above the applicable Clearing Price the opportunity to participate by revising
these Offers ta a priee equal to the applicable Clearing Priee.
Any Holder of Bonds wishing to submit such a revised Offer (a "Revised Offer") must ensure
that the direct participant in Euroc1ear or Clearstream who submitted the Letter of Transmittal
applicable to its Bonds sends a duly signed fascimile ta the Tender Agent and, if applicable,
the Luxembourg Agent at or before 6.00 p.m. CET on 3 June 2009 attaching the original
Letter of Transmittal amended in manuscript to indicate:
(a) the new Reference Code genetated by Euroc1eat or Clearstream upon the submission of
blocking instructions;
(b) the final Clearing Priee of the respective Bonds as set out above; and
(c) the Number of Bonds and Aggregate Face Amount to whieh the Revised Offer is ta
appty.
This will allow such Bonds to be appropriately identified.
RaIders should be aware that following this announcement of the Clearing Priee of the
respective Bonds, Euroclear and Clearstream will unblock the Bonds of those Holders who
submitted Competitive Offers above the applicable Clearing Priee. Therefore, if a Holder
wishes ta submit a Revised Offer, such Holder will need ta take iuta account that the
necessary Bond Instructions to submit a Revised Offer are delivered to and received by \
- t -
Euroclear and Clearstream, in accordanee with their normal procedures on or prior ta the
deadlines established by each of those clearing systems. Holders of Bonds who wish ta submit
a Revised Offer should therefore contact the relevant clearing system or their custodians as
saon as possible with the instructions necessary ta enable Euroclear or Clearstream, as the
case may be, ta generate a new blocking instruction reference code and an amended Letter of
Transmittal with a Revised Offer ta be submitted in respect of its Bonds.
The intention is ta settle the purchase of any Bonds which are the subject of a Revised Offer
on 12 June 2009 and accordingly, in relation ta Bonds that are the subject of a Revised Offer
only, referenees in the Invitation ta the Settlement Date shaH be read as references ta 12 June
2009.
For the avoidance of doubt, in respect of Bonds validly submitted pursuant ta Letters of
Transmittal with Offer Priees originally specified at or below the applicable Clearing Priee,
the Settlement Date shaH remain 29 May 2009.
ln aH other respects, the terms of the Modified Dutch Auction described in the Invitation shaH
continue ta apply and, except as revised in this communiqué, such tenns shaH apply ta
Revised Offers.
ln view of the Republic's decision ta give the opportunity ta Holders who submitted
Competitive Offers above the applicable Clearing Priee ta offer their Bonds at the Clearing
Priee, the Republic will, pursuant ta the terms of the Invitation, issue information no later
than 12 June 2009 relating ta the aggregate amount of Bonds acquired.
Bolders of Bonds should be aware that, foHowing the settlement of the purchase of the Bonds
pursuant ta the Revised Offer and with the exception of any offer at the Clearing Priee of the
respective Bonds that the Republic may make, at its discretion, in any jurisdiction where the
Joint Dealer Managers have been unable ta contact Holders for legal or regulatory reasons,
the Republic will not offer equal or more favourable terms ta those being offered ta Holders
of Bonds presently.
Any Holders of Bonds who did not submit an Offer previously and would wish ta do sa may
cont~z'Vd Frères Banque at 121 Boulevard Hausmann, 75382 Paris, Cedex 08, France,
TelebhOne\-H+~f\1 44 1J 0030 (Reference: The Republic of Ecuador Invitation).
L\ ~1
Minister osfa FVi~itn~cei ÂocfaitthuerrRi epublic of Ecuador
- 2-"

once a wave of sovereign defaults starts, it’s very difficult to stop, since the cost of default drops with each new event

From Reuters:

"Felix Salmon

is summer arriving?

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May 26th, 2009

The cost of sovereign default turns negative

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Posted by: Felix Salmon

Tags: bonds and loans, ecuador, emerging markets

Ecuador has closed out its bond exchange offer at the higher end of expectations, paying 35 cents on the dollar to investors who hold the 2012 and 2030 global bonds. That’s higher than the bonds have traded all year, and certainly higher than they have traded since Ecuador defaulted — which means that any vulture investors who bought the bonds in default will be able to lock in a decent profit for doing essentially no work at all.

What’s more, Ecuador has announced that anybody who put in an offer higher than 35 cents will be allowed to re-tender at the 35 cent level. This makes sense from Ecuador’s point of view, and gives people who tendered high the opportunity to re-think their strategy in the light of known events. It’s pretty clear that at this level a supermajority of the total bonds outstanding will end up being owned by Ecuador — which means that Ecuador will have the ability to strip a lot of creditor protections out of the instruments.

Ecuador has suffered no negative repercussions from its actions — quite the opposite. If the country needs any money in the next few years, it’ll be able to get it, from the Andean Development Bank or the Inter-American Development Bank or the World Bank or even the International Monetary Fund. None of them seem to particularly care that Ecuador defaulted on its global bonds, and emerging-market bondholders are so weak and fragmented these days that they hold very little sway any more within international financial institutions.

Indeed, given the short memory of emerging-market bondholders, I wouldn’t be surprised to see Ecuador regain its access to the international capital markets within a few years, thanks to the way in which it has managed to substantially reduce its (already pretty low) debt-to-GDP ratio. That could well be the thinking behind the decision to remain current on the 2015 global bonds, which were issued when current president Rafael Correa was finance minister. Look, he’s saying: we pay back the money that we borrow. We just don’t pay back debt which was originally borrowed decades ago and which was restructured twice in a manner designed to be as friendly as possible to private-sector creditors.

Looking at this from a systemic perspective, it’s pretty clear that in this instance the cost of default, to Ecuador, was negative. That’s dangerous: it radically increases the probability of tactical defaults from all manner of other countries, including Argentina, Venezuela, and various African states. And once a wave of sovereign defaults starts, it’s very difficult to stop, since the cost of default drops with each new event. Right now the risk of such a wave is surely near a multi-decade high."

Me:

“And once a wave of sovereign defaults starts, it’s very difficult to stop, since the cost of default drops with each new event. Right now the risk of such a wave is surely near a multi-decade high.”

One thing I’m sure of is that anyone can concoct a convincing argument as to why they shouldn’t have to pay back money. At least, an argument that convinces them.

At some point in this crisis, the statement that this is a peculiar and particular event that is self-contained and influences nothing else is going to wear thin. When AIG was bailed out, every business in the country took notice. I can’t believe that other countries aren’t interested in what Ecuador seems to be accomplishing, or that they can’t come up with similar excellent reasons to stiff or trim creditors. We are talking about human beings, after all.

- Posted by Don the libertarian Democrat

Ecuador's President Rafael Correa said on Saturday that key sectors of the economy, including oil and mines, must be in government hands

TO BE NOTED: From Reuters:

"Ecuador says mining, oil must be in state hands

Sun May 24, 2009 1:02am EDT

QUITO (Reuters) - Ecuador's President Rafael Correa said on Saturday that key sectors of the economy, including oil and mines, must be in government hands.

During his first two years in office Correa has taken a tough stand with mining and oil companies, pushing for new contracts more favorable to the state, but has so far shied away from nationalizing any firms.

"We will fulfill the goal of having strategic sectors in government hands," Correa said.

The U.S.-educated economist has recently said he will not nationalize foreign oil companies, but will push for more state control in the key industry via new contracts.

During a joint news conference with his Ecuadorean counterpart, Venezuelan President Hugo Chavez said his drive to nationalize strategic sectors of his own country's economy would continue.

Many sectors of Venezuela's economy, including energy and telecommunications, have passed into state hands since Chavez took office 10 years ago. In recent weeks he has nationalized oil service companies and iron producers.

Chavez also said that Venezuela and Brazil were in talks to create a joint fund worth billions of dollars. It is likely it would be for infrastructure investment.

"One of the subjects we will discuss is the creation of a joint strategic fund ... worth billions of dollars," said Chavez, adding the fund will have funds from the Brazilian Development Bank, BNDES. He said he will meet with Brazilian President Luiz Inacio Lula da Silva next week.

He said earlier his country and Ecuador had signed a deal for a joint fund for investment in energy projects.

(Reporting by Alonso Soto; Writing by Frank Jack Daniel; Editing by Eric Walsh)"

Chinese don’t know what’s inside Citigroup, don’t understand it, and don’t want the headache of owning a highly politicized piece of property

TO BE NOTED: From Inner Workings:

"How about a reverse takeover of Citi by Pudong? April 10th, 2009
By David Goldman

Citi owns a bit less than 4% of Shanghai Pudong. Bloomberg News reported this morning:

April 10 (Bloomberg) — Shanghai Pudong Development Bank Co., part-owned by Citigroup Inc., plans to raise as much as 30 billion yuan ($4.4 billion) selling shares and bonds to ensure it has enough capital to meet regulatory requirements.

The lender will raise as much as 15 billion yuan from a private placement, equivalent to as much as 20 percent of its existing shares, to 10 investors including the bank’s major shareholders, according to a filing today to Shanghai’s stock exchange. The statement didn’t say whether Citigroup will buy shares. The bank will also raise as much as 15 billion yuan issuing subordinated debt.

Hmmm….with 5.7 billion shares outstanding and a share price of 22 yuan, Shanghai Pudong has a US market cap of around $18 billion. Citicorp’s market cap is only $16.7 billion. Why shouldn’t the Chinese diversify some of their foreign exchange reserves into ownership of a major banking franchise? How about a reverse takeover by Pudong?

Well, there are some obvious reasons why not. The Chinese don’t know what’s inside Citigroup, don’t understand it, and don’t want the headache of owning a highly politicized piece of property with considerable exposure to Congressional sniping. The last thing Beijing wants is to sit in the cross-hairs while political snipers scream about selling the American economy out to foreigners. The last time someone from the region bought into Citi, moreover, it was the government of Singapore, which will get preferred shares exchanged into common equity at the equivalent of $3.25 a share. That position still is underwater.

But there is a case to be made for it, and if I were (still) an investment banker, here is what I would pitch to the Chinese authorities:

First, Citigroup’s structured portfolio of “toxic” assets is extremely cheap and manageable now that it doesn’t have to be marked to market. You own a bunch of this garbage anyway, and fund managers turn up on your doorstep daily to pitch distressed investing. You can do a whole lot better buying a distressed bank and leveraging a distressed asset play. Secondly, you can sell off most of Citi’s operations for a modest profit. America doesn’t need another branch bank after Wells Fargo/Wachovia, Chase/Washington Mutual, and Bank of America. Citi should get out of its consumer businesses and devolve into an international wholesale bank. Its main profits should be the runoff on its portfolio, which out to be worth a lot more than $3 a share. Third, by owning a major bank you get a seat at the table of corporate America. You get a peak inside the kimono at every American corporation and the inside track on future mergers and acquisitions. The business intelligence value of owning the franchise has to be worth a few billion dollars. That’s not counting Citi’s international branch network, which would give you the inside track on a dozen countries you don’t know much about. Presuming that the Obama administration throws its political shield over the deal and hails it as a great win for the American taxpayer (presuming you pay a bit more than $3.25 a share so that the Treasury can book a profit on its own 36% of Citigroup), it could be a very wise move. I wouldn’t underestimate the governance problems of running a monster like Citi — your managers will experience great frustration dealing — but at roughly $20 billion, you can afford the experience. After all, you have to learn to run great international finance franchises some time. Why not now?

At a market cap of $16.7, a smaller sovereign than China could afford to buy the joint.

As an aside: There are some very smart people at Citigroup. The franchise is worth a great deal. It took a century to assemble and couldn’t be easily reproduced. For example, in 2007 I spent a few days in Ecuador in my capacity as strategist for a hedge fund. The only major American bank active in the country was Citi, and the local office knew the economy and financial system cold. They gave me very good advice, and helped my fund make money trading Ecuadorian government debt. Citi has a global reach that no other US bank does.

As I’ve noted before by way of full disclosure: I own a bit of Citi preferred, bought at distressed levels, and I happily await conversion into common equity."

This chart shows the percentage of GDP made up by incoming remittances for the major LatAm countries

TO BE NOTED: From Inca Kola:

"Remittances in LatAm, 2008 (the chart of the day)

There has been ink spilled already on the slowdown on LatAm remittances (i.e. money sent back from industrialized nations by LatAm citizens living over there) that the financial crisis is causing, but so far the analysis has been stuck at the amounts of money being sent over and hasn't really examined which countries are more likely to feel the pinch.

This chart shows the percentage of GDP made up by incoming remittances for the major LatAm countries (with all due respect places like Belize are left out as their tiny GDPs skew the results out of shape and don't provide a fair comparative sample). The remittances data used comes from the Interamerican Development bank and the country GDP figures are from the CIA using the purchasing power parity (PPP) figures.

Click to enlarge

Top of the pops on this poll is El Salvador, a country that relies on cash sent home for 8.35% of its country GDP; that's an enormous figure and is comparable to the direct effect copper has on the GDP of Chile. Next up are three other Central American states, Guatemala (6.15%), Nicaragua (5.76%) and the Dominican Republic (3.73%). Only then does South America appear, with Ecuador (2.64%), Bolivia (2.51%) and Paraguay (2.4%).

Mexico is next at 1.59% but deserves a special mention due to the absolute size of its remittances trade. At U$25.145Bn it is by far the largest destination for remittances (second is Brazil at U$7.2Bn) and Mexico in fact accounts for 38.44% of all remittances received in LatAm in 2008.

Finally, the trio of Costa Rica (1.25%), Peru (1.24%) and Colombia (1.19%) are the other three countries that beat the regionwide average of Remittances/GDP of 1.09%. It's safe to say that all of the above countries will feel the effects of a slowdown in remittances in 2009 and beyond, with the first tranche of Central American states, Mexico, Ecuador, Bolivia and Paraguay feeling the worst effects.