A Venezuelan Scenario For Ecuador Seems Averted For Now

The election of center-right Guillermo Lasso as president of Ecuador was well received by the bond market

Published ET

Source: Refinitiv Eikon

Source: Refinitiv Eikon

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The bond market celebrated the weekend victory of Mr Lasso, with the prices of US dollar denominated Ecuadorian bonds rising markedly on Monday. For example, the zero-coupon expiring in July 2030 rose from 42 cents on the dollar to 51 cents on MarketAxess (with the z-spread dropping by more than 300bp, from 1194 to 879bp).

Why are bondholders so happy? Primarily because a nightmare scenario (of seeing hard-left socialist Andrés Arauz win the presidency) was averted.

Let's rewind the tape to see what that scenario could have entailed:

  • Ecuador, a small country, whose economy is heavily dependent on oil exports, has dollarized its economy and is now heavily indebted in a currency it cannot print
  • A hard-left socialist candidate is elected on a platform of generous government handouts, which cannot be financed externally under the supervision of the IMF
  • So the new president simply chooses to renege on external debt and pushes out the IMF
  • That is quickly followed by US-led international sanctions to try and pressure the country into submission
  • Instead the president decides to bring back the Ecuadorian Sucre and starts printing money to finance election promises
  • That is followed by a rapid and brutal devaluation of the new currency, leading to widespread poverty and a humanitarian crisis

OK so THAT is not going to happen. But is the election of Mr. Lasso really going to change drastically the situation ?

  • The legislative branch has been divided since the February 2021 elections that saw the hard left win the most seats, followed by the left-leaning indigenous party.
  • The IMF austerity program is broadly hated, and previously led to violent protests across the country.

At best, President-elect Lasso will be able to build some consensus across the aisle to cut spending and maybe help the development of new mining projects to grow the economy.

At worst, he will try to pass unpopular measures through executive orders and create renewed civil unrest.

Not quite a dream scenario after all.