Sunday, December 28, 2008
"Ecuador's President Rafeal Correa said his nation is defaulting on its foreign debt, in a hardball move prompted as much by leftist ideology as economic distress. Mr. Correa said Ecuador will skip a $30.6 million payment to bondholders due Monday, asserting that there are irregularities in how the debt had been contracted by an earlier administration. ... Oil-rich Ecuador's move marks the first sovereign default since the onset of the global financial crisis in September. While Ecuador had put markets on notice last month that it was threatening such action, the announcement still left some investors agape, as Ecuador has $2 billion is cash on had to pay. ... Investors said the main impact of Ecuador's move would be to make money managers even more pessimistic than they already are about the prospects of countries like Argentina and Venezeula. Together with Ecuador, these countries are considered exceptional cases within the broader group of emerging-market borrowers because of their unorthodox economic policies. All three are also heavily dependent on commodities, whose prices have fallen sharply since September. ... Investors rejected Ecuador's rationale for the default, which was that the debt was illegal. 'That's like Obama coming in and saying that Bush issued Treasurys that were not legitimate,' says Arthur Byrnes of Deltec Asset Management in New York. 'It's amost embarrassing for them'," my emphasis Matt Moffett and Joanna Slater at the WSJ, 13 December 2008.
The rationale is irrelevant. What will Byrnes do about it? Raise an army and invade Ecuador? Since commodity prices are low, we should raise them to bail out Ecuador's debt holders. Why couldn't Obama challenge the propriety of the issuance of a few trillion of our Treasury debt? Because Byrnes finds it inconceivable? US dollar denominated debt is a sell. Byrnes, think about what you said.