The reckless abandon of the Ecuadorian and the Venezuelan governments reflect the lack of regional leadership in Latin America.
BY WALTER T. MOLANO
The recent volatility in Ecuadorian bond prices piqued the curiosity of many investors. The plunge in bond prices, despite Ecuador’s ability to service its external obligations, followed by last week’s spike, after a wave of rumors that the government was wiring its next coupon payment to Euroclear, whipped up the speculative spirits of bond traders and fund managers. In the absence of market volatility, Ecuadorian bonds were the last remaining assets with life. Indeed, the emerging markets are a dull place. Bond spreads are plunging, the supply of sovereign bonds is dwindling and investors are not differentiating between the endless deluge of corporate credits bombarding the marketplace. Hence, it is no surprise to see the excitement caused by Ecuador. Indeed, the Andean country stirs a sense of nostalgia among bond traders who reminisce about the heady days of the late 1990s—when a ten point move represented a single standard deviation. However, one should be mindful about the current state of affairs in Ecuador. Macroeconomic forces drove the market volatility of the late 1990s. Unfortunately, current events in Ecuador are highly choreographed and heavily manipulated.
The aggressive statements issued by members of the Correa Administration are an overt attempt to push down Ecuadorian bond prices. At the same time, the close association between Ecuador and Venezuela, and the Chavez Administration’s growing propensity for market manipulation, suggests that the recent statements about the debt instruments were accompanied by surreptitious buyback operations. A game is, definitely, afoot in Ecuador. Government officials are playing a high stakes game of poker, and they are bluffing their way in order to bolster their bargaining positions. Nevertheless, the game is complex, and there are a lot of seasoned players on the table. Therefore, one should be careful. As the old adage goes, “If you can't spot the patsy at the poker table, then you are the patsy.”
The reckless abandon of the Ecuadorian and the Venezuelan governments reflect the lack of regional leadership in Latin America. Without a major power, or institution, to impose a sense of discipline, rouge elements are moving to the forefront. The U.S. government is too distracted by its Middle East adventures to devote any time or resources to policing the region. Mexico is too bogged down by its domestic problems to pay any attention to events on its southern flank. Besides a minor chastising to its developing country peers that they should stop whining, Brazil is not exercising the regional leadership role that was created by the absence of the U.S. hegemon—a role that it coveted since its independence.
Moreover, the events in Ecuador reflect the failure of the leadership class to move the region into a higher stage of development. The fact that Ecuador’s populist policies are being engineered to boost the political power of a handful of foreign-trained technocrats is a waste of the country’s human resources. President Correa’s socialist slogans sound appealing to the millions of Ecuadorians who are mired in poverty, but they will push the population deeper into misery. President Correa is killing off the chances of attracting foreign investment and boosting the country’s GDP growth rate by making it a pariah in the international capital markets. Instead of taking steps to attract the billions of dollars looking for new opportunities, President Correa is doing his best to ensure that it never crosses Ecuador’s borders. Unfortunately, the application of game theory, populist experiences and Marxist slogans to the goal of personal aggrandizement and wealth accumulation does nothing for the future of Latin America. The new administration in Ecuador is playing games. However, given the asymmetry of the information, the best strategy is to let them play alone.
Walter Molano is head of research at BCP Securities.