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Ecuador could be hit with legal action taken against it by the SEC and bondholders as a result of market manipulation claims, several source said.
On Tuesday, news reports of a video surfaced showing Economy Minister Ricardo Patino meeting with ex Economy Minister Armando Rodas and officials from Venezuelan banks Occidental de Descuento and Fondo Comun.
In the video, Patino, Rodas and the officials discuss making potential gains of USD 50m as a result of “troubling the market”. As reported, three days ahead of a USD 135m 15 February interest payment on its global bonds due 2030, Patino had warned international capital markets that the sovereign could default on its debt in order to commence a restructuring of its USD 10.3bn in foreign debt.. Despite the threats, the payment was made in a timely manner.
The alleged market manipulation could lead to action by the SEC and bondholders affected by the ensuing volatility, legal and financial sources said. “The Commission and State Department should be interested [in this case]. It violates the Securities Act and could be a basis for enforcement action,” a source familiar with the SEC said. However, the source was unaware of any current action being taken by the regulator.
A buyside source said that the sovereign could be liable and open for action in the US. Additionally, affected bondholders could seek attachment of bond payments through Euroclear if the sovereign saw an adverse US ruling in this case. “Attachment would be the easy part,” the source said.
A legal source discounted action by the SEC and saw the situation as more of a political/diplomatic issue. He also took the authorities to task for not supporting creditor rights in the messy fallout associated with Argentina’s 2001 default.
“The SEC and US government have not been strong in going after foreign issuers. Investors are cynical of the IMF and SEC in the emerging market space,” he said. “All they do is legitimize the bad acts of foreign governments.”
Yet bondholders should not get too comfortable if they are successful in getting a court order allowing them to seize sovereign payments. According to reports, Argentina has done everything to avoid attachments won by disgruntled holdouts, issuing locally or going through the central bank for protection.
In line with Argentina’s experience, the legal source said that under pressure, Ecuador could solicit bondholders to consent to onshore payments or stop performing and declare payments through other vehicles. Although “it would not look good”, the sovereign could take these measures to counteract an adverse ruling in US courts or the expense associated with a legal slog in US courts.
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