The International Monetary Fund and bondholders flex their muscles over the developing country's debt.
LAST SEPTEMBER, A FEW DAYS BEFORE Ecuador became the first country ever to default on Brady bonds, bankers in New York were scrambling to arrange financing for the small Andean nation bludgeoned by natural disasters, a banking crisis and chronic mismanagement.
Without fresh funds, President Jamil Mahuad's options were stark: Miss the debt payments due in August or stop paying government workers. "We told Ecuador if you can get an IMF [International Monetary Fund] letter of intent, we can do a deal," says one banker, who took part in the failed refinancing effort but asked to speak anonymously.
Such desperate financial juggling acts are nothing new for the poorest, countries. But this time, IMF chief Michel Camdessus didn't go along with the usual script, refusing to back a US$400 million loan program for Ecuador. Many people involved allege that the Fund encouraged Ecuador to default on its bonds to show that it won't always be around to bail investors out of emerging market disasters--a charge vehemently denied by IMF officials.
Bondholders, however, were not keen to learn the IMF's lesson about "burden sharing." Immediately after Ecuador announced its intention to default, word got out in Latin American debt markets in New York that so-called vulture funds were amassing the country's debt at rock-bottom prices and were prepared to sue the country for payment on the debt.
Since then, Ecuador has become a battleground between the IMF and investors over the principles of lending to developing countries. At its core, the debate centers on whether creditors will forgive bond obligations and who gets stuck with picking up the tab.
Marc Helie, head of a vulture fund, Gramercy Advisors, whose sole mission so far is to collect on defaulted Ecuadorian and Russian debt, has emerged as one of the loudest defenders of bondholders' rights.
A self-described creditor advocate, Helie proclaims a brave new world of bondholders, bringing market forces to bear on failing developing countries like Ecuador to an extent never seen before in the long-winded decorous Latin American debt negotiations of the 1980s that ultimately gave rise to the so-called Brady bonds. These bonds are named after former U.S. Treasury Secretary Nicholas Brady, who led the effort to convert hundreds of billions of dollars in existing Latin American loans into bonds. "Bond investors...