International Investments in Ecuador Stretch Values through Fear – A Spicy Multi-Currency Sandwich

by | Feb 12, 2007 | Archives

International Investments in Ecuador can add spice to your international investments mix. Friday’s message looked at how to create a multicurrency international investments portfolio of AAA rated Scandinavian bonds that averaged a 5.75% return and had opportunity for forex profits. A totally different way to cash in on international investments in bonds is to speculate in issues that are scaring other investors away. Take international investments in Ecuador bonds as an example.

The Ecuadorian government has coupon payments due on 15 February. Uncertainty on whether they will be paid has pushed up the yield on Ecuador bonds. International investments will be affected by this.

International Investments Quote #1

Jyske Bank recently wrote: “Ecuador’s bonds rose significantly after the finance minister indicated that 9.375% Ecuador 2015 may not be included in the debt restructuring. Given the current situation in the country, continued high uncertainty is to be expected and announcements like the above will be pushed aside. Subsequently bond prices declined slightly again. At a press conference, Finance Minister Patiño stated that the coupon payment on 10% Ecuador 2030 will be made, if the government estimates that the necessary means are available. The coupon payment is set for 15 February, but according to the wording, the government may use the additional 30-day deadline to effect payment without defaulting.

“Furthermore, it is not clear whether 9.375% Ecuador 2015 will not be included in a debt restructuring, if any. The statement at the press conference could implicitly indicate that it will not be included, but subsequent comments indicate that all issues will be subject to a restructuring, if necessary. The Argentine team in charge of the restructuring negotiations back then, was invited with a view to benefiting from its experience. This is yet another sign that the government of Ecuador does not have specific plans for a debt restructuring, which again indicates continued uncertainty in the market.”

Times like this are rich with fear and this fear usually creates international investments value via a fear premium. You can see the huge conflict of opinion by reading what a few analysts have said about Ecuador’s new president.

International Investments Quote #2

Dennis Garman wrote: “ECUADOR: Rafeal Correa is now the President of Ecuador, and we fear that this one-time OPEC member state shall never be the same for the damage we fear that he shall wreak upon the country. A close ally of Venezuela’s General Chavez, Mr. Correa, a well educated economist of an inordinately leftward bent, campaigned on the platform of overhauling the Ecuadorian economy utterly and completely, changing the composition of various public institutions, pushing spending upon public programs far ahead of the repayment of past debts… and, perhaps most importantly, reviewing contracts that had previously been signed between past Ecuadorian administrations with foreign investors, oil companies, mining firms, etc. Oh, and he wants to end a long standing lease that the US military has had in place for years.

“Mr. Correa has made it very, very clear that it is his intention to push for very material changes in Ecuador’s constitution, granting to himself and to the national assembly the right to ‘restructure or dissolve’ any of the other branches of the Ecuadorian government. The greatest concern on the part of international investors is that Correa is prepared to turn Ecuador’s back upon debts it had incurred in the past. He has made it very clear that he is prepared to stand entirely down from those debts. Recently, he said, in a statement that struck fear into the hearts of foreign investors, With this level of debt, we cannot move the country forward. A country that spends twice as much on foreign debt as it does on education cannot develop. We fear he means what he says, and we have no reason to put him to test by investing in Ecuador. We believe him. He is a leftist. Let’s understand that and move on, leaving Ecuador to suffer the consequences of his policies in the future”.

International Investments Quote #3

Sam Hopkins on the other hand says: “MEET ECUADOR’S NEW MAESTRO Rafael Correa is no Hugo Chavez. He obtained his PhD in economics from the University of Illinois, and has voiced his discomfort with the Venezuelan leader’s characterization of George W. Bush as a sulfur-smelling devil. However, Correa has also made clear his displeasure with his country’s relationship to the Yankee oil industry. Now, in 2007 we see the inauguration of Dr. Correa, Ecuador’s eighth president in ten years. Correa speaks Quechua, the country’s predominant autochthonous language, which has given him a huge dose of respect among the indigenous population while his economic professorship gives him credence in the technical arena of debt restructuring. And debt restructuring is one of Correa’s primary goals, along with the recomposition of the country’s political system. He wants a popular vote to establish a new constituent assembly, which would in turn establish a constitution that marginalizes the powers of traditional political parties. This is not as totalitarian a shift as an outsider might think, as Ecuadorians have very little faith in their politicians. As petroleum can help fuel debt relief, Correa inherits a country that was already tilting towards socialist measures to that end. Argentina restructured 100 billion dollars of its debt, but Ecuador only has 10 billion dollars in total debt. Critics also point out that Ecuador is spending far less on interest for its debt repayment plans than are Colombia and Brazil, which have not taken such a hawkish stance towards their external obligations. When it comes to energy resources, leverage can be as good as revenue in the minds of many political leaders. They are, however, playing with fire. Bolivia and Venezuela, among other countries renegotiating production sharing agreements these days, will find it hard to keep the money flowing as their foreign-based expertise dries up along with drill holes and wells. National pride is one thing, but foolish pride is quite another. Let’s hope that Dr. Correa can exercise his academic mind to balance the needs of the people with a pragmatic business sense. Then the burden on Ecuador will truly be reduced, and everyone can dance to his music together.”

Without discussing the merits of these two quotes the point here is the questioning, conflict and confusion. Such conditions create fear and fear creates a premium for some international investments.

International Investments Warning

Let me be clear. Investing in Ecuador bonds is a big international investments speculation. Losses in these international investments could well be incurred.

The point is this speculation may be a good value because the premium you are paid to take the risk is higher than need be.

I tend to agree with Hopkins. Correa has the potential of something good. Garman seems to have slanted his article negatively a bit more than required. For example the “long standing” military lease Garman mentions has only been one term of eight years. As usual the US has done its best to offend as many people as it can by being the big bully. This lease is something agreed to by a corrupt Ecuadorian government a few years ago. Correa is probably right to correct this. He is also being a smart statesman as he can probably gain a lot for Ecuador from the US by making them pay to change his mind.

The point here is that there is much conflict of opinion which creates value in some international investments.

Some investors have already cashed in on this fact. A Bloomberg article of February 9, 2007 said: “Ecuador’s bonds had their biggest gain in three months after Economy Minister Ricardo Patino said the government may seek a ‘friendly’ renegotiation of its foreign debt. The government’s benchmark 10 percent dollar bonds due in 2030 surged 5.75 cents on the dollar to 74 as investors said Patino’s remarks suggest the government may move away from its confrontational stance with bondholders. Patino said that a negotiation ‘free of pressure is more convenient’ and that creditors are not the government’s enemies.”

This dropped the yield on Ecuador government 10 percent bonds, from 14.89% to 13.73% last week.

However there is still doubt in the market and the Bloomberg article went on to say: “What they regard as friendly is not the same thing investors think is friendly,”‘ said Edwin Gutierrez, who manages $2.2 billion of emerging-market debt at Aberdeen Asset Management Plc in London.” “It was overly optimistic to think they could come up with a plan in two weeks,” said Cathy Elmore, who helps manage $700 million of emerging-market debt at WestLB Mellon Asset Management in London. “I don’t think they’ve made any decisions yet.”

Jyske Bank’s emerging market department says the market is concerned about the next interest payment on one of the international (once restructured) bonds due February 15 and the country’s credit rating is a very low CCC. Right now is when fear is likely to be the highest if the government pays on time this week. If they take their 30 day delay, yields could rise even more.

There are three issues that international investors can buy; #1: 8-15-2030 (10%), #2: 12-15-2015 (9 3/8%), #3: 11-15-2012 (12%).

International Investments in Ecuador government bonds can earn 13% and perhaps even more if the government surprises the world and is friendlier than expected. I would not leverage an investment like this but investors who are willing to take a greater risk for a higher return this may be a good part of a speculative mix that is better than investing everything right now in overheated emerging equities.

International equities may continue to offer great value but if there is turmoil in emerging markets created by a rising yen, this portfolio shows that there are very safe alternatives in fixed returns that could do very well.

Both the international investments in bond and equity portfolios we are tracking in our Multi-Currency Education service are doing well.

Last year the five international investment portfolios we created and tracked rose:

US Dollar Long9.04%
US Dollar Short10.43%
US Dollar Hedge11.46%
Emerging Market42.93%
Asia Emerging Market114.16%

This is really an excellent performance but this year our new international investment portfolios are rising even more…much more.

Here are the five updated 2007 multi currency portfolios and their performance since November 1, 2006.

PortfolioDecember 29, 2007 January 30, 2007 February 6, 2007
Swiss Samba8.10%10.18%13.83%
Dollar Neutral7.94%12.63%13.62%
Emerging Market15.11%14.83%17.46%
Dollar Short12.91%9.71%12.50%

This is impressive performance in every direction with every portfolio running in the 100% per annum range and the green portfolio running at a clip of nearly 250% per annum growth!

You can learn why these portfolios are rising and track them with us. Learn how at

You can continue this message and learn about Happy Healthy Meals at

Until then may all your international investments be good.


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Mar. 16 -18, Fri.-Sun. International Business and Investing Made EZ.

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