Since I wrote about Ecuador on Friday, there’s been a trickle of emails coming in from individual investors who hold the country’s bonds. These two came in quick succession:
I’m not into locking up on default for months/years while the court battle rages so i’ll just dump the bonds… the big boys can fight the bigboy dances all by themselves.
I would be very happy to act legally against the country – but lack the knowledge and resources.
Both these emails raise the question of whether individual investors can or should attempt to sue Ecuador for the return of their money. My feeling is that the first investor has the right idea: if you’re not an expert in such litigation, with a large budget for it, don’t go there. Yes, it’s possible that small creditors will be able to piggy-back on the heavy spadework done by big vulture funds in the Southern District of New York, so it might be worthwhile joining a class action somewhere, if it doesn’t cost you anything. But anything beyond that is likely to be prohibitively expensive.
On the other hand, small Ecuador bondholders might not have to do anything at all. One of the most important changes which Ecuador made the last time it defaulted, in 2000, was that it switched all of its bonds from an unwieldy fiscal-agent system to a much more bondholder-friendly trustee system. As result, it’s entirely conceivable that the trustee, who acts on behalf of all the bondholders, will end up being the recipient of any money successfully attached by litigious vulture funds — with the result that all such funds will end up being distributed equally among all bondholders rather than going entirely to the "big boys".
Either way, selling the bonds now, when they’re trading for twentysomething cents on the dollar, seems to me like getting out at the bottom. Even if the litigation isn’t successful, there’s a reasonable chance that the next Ecuadorean president, whoever it turns out to be, will end up paying the debt. And given how long Ecuadorean presidents normally stay in power, especially after they default, that day might not be too far off.
Incidentally, I pulled out my old April 2001 Euromoney cover story on Ecuador’s last bond default to see if I’d written anything there about trustees and fiscal agents. And as I was flicking through it, I was tickled to find this:
To be a Treasury official in charge of dealing with an Ecuadorean bond default once is bad enough. But to find yourself in charge of America’s official response to two Ecuadorean bond defaults feels almost unfair. Maybe Geithner will just kick Ecuador down to the undersecretary for international affairs, and pay it as little attention as he can get away with. I, for one, certainly wouldn’t blame him.