Just how much damage can one president do by defaulting on a single $30 million coupon payment? Well, he can cut off his country’s access to US markets, via the Andean Trade Promotion and Drug Eradication Act, and he can cause growth forecasts to turn into recession forecasts:
The ATPDEA gives Ecuador duty-free access to the United States for 5,000 products. However, its ATPDEA benefits run out in December next year and may be cut earlier as the U.S. Congress reviews its status as a result of a recent wave of actions against U.S. investors. The latest debt default doesn’t exactly boost Ecuador’s chances of keeping the ATPDEA.
As a result of the debt default, Credit Suisse has revised down its growth forecast for Ecuador’s economy next year from 2.0 percent to minus 1.0 percent.
To put this in perspective, Ecuador’s GDP is about $100 billion, so a drop of 3 percentage points means a fall in GDP of about $3 billion — more than all of Ecuador’s bonded debt combined.
What’s more, you can be sure that somewhere down the line, a few big fund managers are going to appoint themselves creditor representatives, as far as the media is concerned; there will probably even be some kind of formal Ecuador Creditors’ Committee. They will be loud, and they will be right, and they will have much more heft in Washington than Ecuador does.
Eight years ago, during the last Ecuador default, Tim Geithner did a reasonably good job at ignoring Ecuador’s noisy creditors and siding, as sovereign debtors are wont to do, with the sovereign debtor. Now I think his sympathies are more likely to lie on the other side, since Ecuador’s government is destroying much of the basis of sovereign finance by simply refusing to pay what it owes not because it can’t pay but just because it wants to make some score political points.
Remember that US Treasury debt is considered risk-free despite the fact that the Treasury could cease making payments any day it liked. When Ecuador last defaulted it really was suffering major economic difficulties, thanks to El Niño and $10-a-barrel oil. This time is very different, and Ecuador’s likely to find itself with precious few friends going forwards.