The external debt of Ecuador

 ! No. E 66 CONFIDENTIAL 66973 This report is restricted to those members of the l:ltaff to whose work it directly relates. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT THE EXTERNAL DEBT OF ECUADOR November 3, 1949 Economic Department Prepared by: Mr. Andersen Mr. Lynch Mr. Pollock  THE EXTERl.I!AL. DEBT OF ECU A.OOR --_-,_._ I • Ecuador's external debt comprises two main parts, namely, an "old II debt arising from the financing of the Guayaquil and ~uito Railway in the late 1890's, and held largely in Britain, and a "new" debt \-1hich consists of intergovern.... mental credits e}..-tended to Ecuador since the beginning of Horld Har II, primarily obligations to the U. S. Export-Import Bank. The amounts of principal outstanding as at July 19LI9 totalled some ;:~2.3.4 million, of l1hich the !lold" and "neH" portions were some (;,12.5 million and (~lO.9 million respectively; this total, hm..rever, uill increase to ,; ..31 million as undis- bursed Eximbank credits of ~;7.6 million are fully utilized. The net e;~erna1 principal liabili ty, hOi-leVer, should not exceed ::~27 million since an e stimated ::;;4 million of the "oldl! debt is believed to be owned by the Ecuadorian Government. Finally, and in addition to the above, interest arrears on the uold" debt have accUImllated to nearly ~';20 million. The servicing records of the t1'TO debts provide a sharp contrast. Pay... ments of interest and principal on the Hold" debt have been consistently poor. No service payments have been made on the "old" debt since 1929. Of some :::;14.8 million principal authorized and issued, over ~j;12.5 million st,ill remains out- standing, and interest arrears of ~19.7 million exceed the outstanding principal by over ~':;7 million. The IIne\ll1 debt, hm..rever, has been consistently serviced and no default on either interest or principal has been recorded to date. Although various offers have been TIade and discussions have tru~en place beb'Jeen the Ecuadorian Government and the British Council of Foreign Bondholders I.  II .. concerning a settlement of the "old" obligations (the last Ecuadorian offer \'laS made in 1945), no agreements have been announced to date. A.ssuming that the 1948 Chilean debt settlement terms "Jere used as a basis for resuming service of the "old" debt; that one third of the "01c111 debt was held internally; and that Eximbank credits are draHn dmm on their closing dates, the anl1ual external servicinG charges for both the "old" and "nault de:.,t.s tvould total some (?l.5 million in 1949, rising to a maximu.1Jl of ~?2.3 million in the early 1950's and declining gradually thel~after.  THE EXTERlT AL DEBT OF EClJ ADQfi. 1. The present outstanding external debt of Ecuador totals approJdmately ;;~23.4 million, 1,Ihich ,dll increase to fi3I million as the undisbursed portion (approximately f;7.6 million) of present Eximbal1k credits granted is fully util- ized. In addition, interest arrears have accumulated on pre'l1ar debt to some (~19. 7 million. Part of the outstanding principal (estimated at some foi.4 million) , is o\IDed by the Ecuadorian Government itself, so that the present net foreign claims outstanding are reduced to C1904 million. Therefore, the net figure, including the undisbursed Eximbank funds, \dll total C,27 million, apart from the interest arrears. 2. The debt falls sharply into tl110 portions, i.e. uoldl! and "neu ll • The !lold" part \Ias incurred at the start of the century, and arose almost entirely from the financing of the Guayaquil and Quito Railway. r~lthough denominated in dollars, the bonds appear to be held largely in Britain. The servicing record of this loan has been very poor throughillut, and since 1929 no payments have been laade whatsoever. Of the :::;23.4 million outstanding principal as mentioned above, the 1I01d ll debt represents approrimately half, Le. (::,12.5 million, and the interest arrears on this floldl! debt total some ;:;19.7 million. The llne.jll debt consists exclusively of interGovernmental credits con- tracted during and after Horld Uar II, to the extent of 018.4 million, of uhich nearly ~)7.6 million has, so far (July 31, 1949), not been drallll. Apart from a debt to Venezuela of (:0.5 million in connection \-lith the Gran-Colombian shipping project, the Ifne\.," debt is oived wholly to the United States, predominantly in the form of EJdmbank credits. There have been no defaults to date on the "ne'lrT" debt. 1.  2• .3. ~ !!Old" Debt Before World ~lar II, Ecuador's external publicly subscribed bonded indebtedness resulted almost entirely from the Guayaquil and ~uito Railway bond issues of 1899~ guaranteed as to principal and interest by the Government. This railway cOlllpany was originally incorporated in Nell Jerf3ey (1897) and merged into a Delaware corporation of the same name and capital structure in 1940, and pre- sently operates some 288 miles of rail lines from Duran to Quito under govern- ment conoession. Pursuant to this concession, in 1968 the railllaY and ec..uipment, in good 1:lorking order and free from all liens and encumbrances, is to revert to the Government, to \Jhich the oompany shall have delivered (uithout indemnity) $5,250,000 of oanoelled preferred stock, provided that all the government- guaranteed bonds have been paid off. In 1925 the Government purchased ~.·5, 706,900 oommon and preferred stock (all par values of ~~100) for (;600,000. This purchase, together ,Jith the 49C;~ of the stock formerly held, gives the Government oontrol of the companywll Under contracts of 1897/98, the Ecuadorian Government guaranteed the interest and principal for .33 years of ~.>12, 282,000 6% 1st mortgage bonds. In 1908 a new (negotiated) agreement lias reached, to be the final settlement of all past disputes betiVeen the Government, the raihlay, and the bondholders. These 11 The present status of the capital stock appears to be as fol10",S: Common: A ~~ 3,445,680 $ 3,445,680 (100%) " B 3,586,,320 2,86,3,270 ( 80%) II C 1,000 Nil Preferred 5,220 ,000 ---k,.84J,10Q ( 54%) $12,283,000 (~ 9,152,050 ( 75%) The Class C Common stock is held by the Council of Foreign Bondholders in the interest of the bondholders. It has special voting rights, the right to appoint .3 directors, and is subject to redemption at par a~ time after all the government-guaranteed bonds have been redeemed.  J. 1908 agreements provided, among other things, that interest and principal pay- ments \.Jould be guaranteed by the Government so long as the tonds remained out- standing; that the interest rate \.JOuld 1::e reduced to 5% and holders ilou1d receive as compensation non-interest 1::earing certificates of :,i'100 for every :",1000 bond held, to be redeemed out of 25% of net earnings after providing for the bond ser- vicing; the bonds Here to have a first charge on Ecuador's entire customs revenue and all the property of the company; and that the Government should remit to the British Council of Foreign Bondholders the amount required for servicin€,' the ne"l.J' authorized issue of::,lO,808,OOO 1st mortgage Sf s (C,l,/1-74,000 of the original ((12,282,000 issue had been cancelled by the Government under the same 1908 agree- ments). By 1909/10~ however, the Government had defaulted on most of the terrns of the ne\] agreement. Although the Government had stated that after Decemtcr 31, 1908, there Hould be no prior or E§..:r;:! l2.fi.mm charges on the customs revenues, steps tnken by the Council in U. S. courts failed to recover moneys received out of customs receipts preferentially pledged to the bondholders. In March 1920, decree of the Ecuadorian Government \.Jas issued ordering 22% of import duties to be deposited for debt servicing, but it is understood that this decree '.Jas only partially observed. Despite repeated protests by the Council, no remittances 'tiere rnac.~e by the Ecuadorian Government after 1929 in respect of external debt servicing_ Sums allocated in the budget for this purpose and due July 2~ 1929/31 Here appC:crently deposited in a local bank uithout being used, but by 1931 even these deposits were discontinued. The three other issues comprising the flold!! debt have all been related, directly or indirectly, to the Guayaquil Railuay. The Condores 4' s for instance were issued to the raihk'-Y company in exchange for certain old bonds of the Ecuadorian Government previously held in the company's portfolio. O:drinally this issue was to have 1::een serviced by a specified percelltage of Ecuador's customs receipts, but in 1908 the entire customs revenue 'Has preferentially pledged to the mortgage bondholders. The reason for the issuance of the non- interest bearing certificates has been mentioned on page 3, and the 4% salt bonds of 1908 were issued mainly in e~{Change for three coupons (January 1908/09) due on the 1st mortgage 51 s. Although expressed in dollars this debt \fas in reality a British loan, and mostY of the defaulted bonds (appro~dmate1y 2/3) are nm'l presumed to be held in Britain, the balance by the Government of Ecuador. These issues have con8i8- tently shown a poor servicing record, both as to interest and amortization of principal. The July 1949 situation concerning this Hold" debt appears to be as fol10vlS: (u.s. Dollars Thousands) Type of Issue and Authorized Principal Interest Last Paynent DenOIllination .. illl,(L;I:.sJl1led Ot!.tstan~pg _l~r.~r.2 _]r.ad~ ,__ 1. 5% 1st mtg. bonds of (1899. 12,282) 10,722 19,000 1929 (1914 coupon) Guayaquil and Quito RR,1908 10,808 = 1899-1932 (~~1000) 2. Non-interest bearing certificates, compen- sation for reduction of inters st from 6% on above, 1908 (~~100) 1,080 1,080 none 3. 4% Salt Bonds, secured on Salt Nonopoly and issued for purpose of funding 1908/9 coupons on Ry bonds, 1908 (~;i90) 1,075.05 459.9 377 Coupo;:)s paid to 1929. 4. 4% Gold Condores Bonds, 1901-1934 «()400) :;1*,6 --- 287.2 -3.12 ~9 (;1,~pJ.29up£n) TOTALS 14,71$.65 12,549.1 19,710 -- There is also a French franc obligation to the ~ £l:~~is~ ~ Cl~~in de l(jlr J:. .!.E...91l~ dated 1909, on Hhich no interest ,,,as paid. Due to its small dollar Jj Less than ~~l,OOO,OOO is held by U. S. nationals.  5. total houever «;,24,000 at the present franc rate)lI and the fact that Ecuador has never formally admitted liability by including it in the official public debt statements j (the Government claims that the contractors did not fulfill all the re<luirements of their respective railroad and port contracts), it r.lay be dis- regarded. Nevertheless, the Government appears to recognize some liability and has evidently engaged in some informal negotiations for its retirement. In 1927 the Ecuadorian Government signed a contract vii th a Svledish syndicate (Kreuger's S\-1Sdish Hatch Co .. ), granting them a 25 year match monopoly, ,.nth the syndicate advancing a loan of 10,000,000 sucres at 8% (then ;;p2,OOO,OOO) to the Government to be used as a guarantee fund for creating the Eortgage Bank of Ecuador. In 1931 the Ecuadorian Government cancelled this monopoly, (declaring it unconstitutional), and the cancellation was to involve repaJ~nt of the syndi- cate loan. In 1932, the outstanding bonds, totalling approximately $1.9 million, were reported to have been deposited as collateral for a loan in Neu York of the same amount, plus accrued interest. In January 1939 the liarine ljidland Trust of New York concluded an agreement with the Ecuadorian Government and the llortgage Bank, to settle the f:~1,879, 290 8% match loan and ~;;970, 791 bonds of the Eortgage Bank \lhich had also been held as collateral. In February 1939 the riarine Trust announced that it had received (i750,3l2 in full settlement of the 8% bonds of the Government of Ecuador and 7% bonds of the Hortgage Bank held by it as part of the collateral. The settlement was on the baSis of 22% of the principal ~lount of the bonds plus 22% of overdue interest, accrued the reduced rate of 6% to December 1, 1935. 11 This dollar countervalue assume s the bonds to be denominated in French francs 1.]ithout a gold clause. One source - Hoodyl s 1946 Governrn.ents - speaks of IIgold francs" but this probably merely indicates pre-1914 francs and is the only source referring to "gold francs. II  6. 4. Contractual Service Record of the "Old" D~'o:t a) J-tlt !1ortgage_u Princina1: !:~1, 560,000 has been retired to date out of the originBl 012,282,000 authorized and issued. HO\1ever only )36,000 should be considered as a cash payment since 01,474,000 lIas cancelled by the Gover!"Jllent under the 1908 agreements. Tlms, sinking fund payments have been in default since 1908 except for 1913 when C71,OOO of the bonds were retired and in 1928 Hhen a par- tial year's sinking fund payment Has made. Intere,s:t: .3 coupons (Jamary 1908 through January 1909) vIere surrendered for 4% Salt Bonds in 1908, and interest payments were apparently made until 1913. Thereafter and until 1929 only intermittent interest payments were made, i.e. January 1913 coupon paid in 1925; July 1913 paid in 1928; and JanuarJ 1914 in 1929. No payments of any nature were made after 1929. b) Q.~ No servicing whatsoever has been recorded for the non-interest bearing certificates of 1908. During 1910-13, service on the Salt loan was delayed but coupons due January 1913 to July 1914 Here met promptly and the sinking fund uas provided for in 1914. Interest and sinking fund payments both ,.rent into default in 1915. Coupons due January 1915 to January 1917 VIere paid in 1920; due July 1917 to July 1918 in August 1925; due January 1919 to July 1925 (at a reduced rate of .3%) in 1925 and 1926; due January 1926 in February 1926; July 1926 Has paid on due date; due January 1927 to July 1928 in July 1928; due Jamwry 1929 on due date. Subsequent interest payments have been defaulted. Sj.l:lldng fund payments ,,-rere reSluned in 1926, not provided in 1927, resu.TJled in 1928, but they too have lapsed since suspension in 1929.  The 4% Condores bonds of $311,600 were originally delivered by the Government to the railway in return for some former consolidated bonds issued at $)33,600 of which some $22,000 had been paid off through a sinking fund. The last sinking fund payment on this issue (the one due in 1909) was made in 1920. Some interest payments were made after much delay, i.e. July 19l2-January 1916 in 1928, and the last payment (coupons of July 1920) ~r.as made in January 1929. In JUly 1929, bondholders were invited to deposit their bonds with the British Council of Foreign Bondholders and some $7,000~000 have been so deposited to date. Up to the present time no mutually acceptable arrangements have been made by the Ecuadorian Government and the Council for resumption of interest or sinking fund payments. The last offer by Ecuador was in 194" when two alter- native optionsl/were offered to each bondholder but neither proposal was accepted by the Council. As a result the outstanding principal still remains at $12,,49,000, and the interestb arrears is some $19,710,000. The differences between the Ecuadorian Government's last offer and the counter proposals of the Council ~o not appear to have been excessive so that it would not seem impossible to arrive at a mutually satisfactory settlement. 1/ Ontion 1. Re~ption of interest at 2% on all bonds, and of sinking funds of 1% on the Guayaquil and ~uito and Condores Bonds, and 4% on the Salt Bonds. Arrears of interest were to be renounced, and a cash payment of 4% was to be made on each outstanding bond whose holder acce~ted these terms G Option 2, The Government to purchase bonds of ~ny of the three loans at 40% of the nominal value. The Council proposed that these options be amended as follows: Ontion l~ Interest on G. and Q. bonds to be 2~%. After the redemption of the Salt Bonds, their debt service was to be applied to the other issues. Ontion 2~ To take account of the different proportions between principal and arrears on the different issues, the purchase offer to be 20% of principal plus arrears instead of 40% of principal.  s. 5. The "New" Debt. No external publicly subscribed bonds have been floated by Ecuador since the abovementioned issues. During and after World War II. however, Ecuador has incurred intergovernmental loans totalling $18.4 million (with some 94% being Eximbank credits), of '''hieb the undisbursed Eximbank funds totalled nearly $1.6 million as at July :31, 1949. The non-Eximbank items still outstanding total some $984,000. representing a Surplus Property advance by the U. S. Government, and a shipping debt to Venezuela of $500,000 in respect of the mutue~ Gran-Colombian shipping project. There alsc> appears to be a small Lend-Lease obligation to the U .. S. Government t details of which are kept confidential. The July 1949 ai tuation concerning the "new..f debt appears to be as fol10\"s: Lender Furnose 1. Eximbank Mainly higp,ways 9,888,4:37 7.571,900 and wate:rtV'orlts , (7/31/49) (7/31/49) 2. U.S.Govt. Surp;t.us Property 484 .. 276 3. Venezuelan Govt. Joint Shippi:og Company .500,000* Total 10!8Z2?Zl} * The amount repaid, if any. and the terms of repayment are not available. 6. Contractual Service Reootd of nNew" Debt. Although information is not avail- able as to the amount repaid or the terms of repayment for the small U. S. Government Lend-Lease obligation and the Venemelan Government joint shipping loan ($500,000) t there has been no indication of' default on e1 ther .. , There has also been no default to date on. the Eximbank credits •. A. "OldIIDebt. Possible future annual service charges on the total 3cus- dorian external debt esuld only be determ~ned after a settlement of the "old tt debt has been agreed upon. However, in the absence of such a settlement, these charges could be estimated on the basis of the following assumed plans: (1) Using the new (1948) Ohilean settlement,l/ '"ith an additional clause requesting that 10~ of the present interest arrears be exchanged for identical new bonds: this basis would result in $1,971,000 new bonds being issued to settle the outstanding,interest (and thus increasing the total principal eutstanding, to $14,520,100), and an annual service charge rising from $363,000 ~n 1949 to $546,000 in the seventh and succ~eding years. 'If, however, one-third of the bonds are assumed to be held internally, the above totals would be reduced to $1,320,000 as bond settlement for interest arrears (making the total principal outstanding $9,680,000), and annual service charges to be transferred abroad would rise from $240,000 in 1949 to $360,000 in the seventh and succeeding years. (2) Using Ecuador1s 1945 Opti?n 1 z/: This form of settlement would result in a cash payment of $500.000 if all bondholders accepted these terms, and an annual service charge of $390,000. If again we assume one- third of the bonds to be held internally, the above totals ~iould. be re- duced to $330,000 as a cash settlement, and an ~nnual service charge of $260,000. B. ITNew" Deb" On the assumption that undisbursed Eximbank credits are drawn down by the respectlveclosing dates, the service of the "new" debt, (excluding the Lend-Lease and Venezuelan advances) would rise from apprOXimately $1.2S0,000 in ~I New bonds, par for par, to m~ture in 45 years, bearing interest ris~ng from l~% at the outset to 3% after the fifth yea:r. with a sinking fund for the first f1 ve years at l% of the iotal amount in deflml t and thereafter at the rate of 1% of the bonds outstanding each year, 2/ See footnote 1/ Page 7.  10. 1949 to a maximum of some $1,900,000 in 1951, declining gradually thereafter. Thus. on the basis of the assumptions outlined in settlements A(l) and ~ above, and as~ing that one-third of the "old" bon~s ~e held internally, the external service cos~s for 1949 would total some $1,500,000, rising to a peak of approximately $2,300,000 and declining gradually thereafter. About fiv&-sixths of the above assumed servicing totals pertain to the "new" debt which. as !>revious- ly mentioned, has been regularly serviced to date. c. §erviQin£ Ability. The first two columns of the table below indicate the dollar value of Ecuador's total exports and holdings of gold and foreign ex- change before and after World War II. The last two columns aho", the ratio of eX- ternal servicing charges (calculated on the basts of assumptions as given in foot- notes z/ and l/) to Ecuadorfs total and U. S.-directed exports. Eeuador= Exl20rts and Foreim Reserve Holdings (U.S. $ j\Hllions) Total 1I Gold and 1I Estimated External Debt Servicing Exports Foreign Exchange Charge$ ae a Pe!Cintage of Total EXV9rts Exports to U.S.A. 19:37 13,,05 5.. 3 1938 9.38 3..8 1946 :38,,50 36'15 1947 44.70 26.6 1948 47.90 27 .. 9 1949 35"OO(est.) 25.7(June) 1/ All data obtained from IMP International Financial Statistics, July 1949. except the 1948 export total (taken from statements of Ecuad~rls Central Eank) and the 1949 export total (IBRD estimate). . zJ Servicing charges for 1937/38 (totalling approxim~te1y $500,000 annually) were calculated by using contractual interest and sinking fund rates for the "old 1f debt t but neglecting any settlement of past interest arrears .. J/ The annual service charges for 1946-49 were taken at the round total of $2,000 9 000. i.e. as an approximate average of the high and low figures ($2,300,000 and $1,500,000) following from the assumptions in paragraph E above, Present estimates, indicating a reduction in Ecuador·s 1949 exports to  11. some $35.000,000, would give a servicing/export ratio of nearly 6% for that year. If Ecuador's postwar export level remains between $30 and $40 million (at a~ annual~average of $35,000,000) and the peak annual servicing charges are $2,300,000, the maximum ratio of service charges/exports would be 6.6%~ This implies that the ratiO for 1949 and following years will be slightly higher than for the previous years. It should be noted, however, that if Ecuadorts exports fell to the 1937 level (Ecuador's highest export total during the decade 1931/40), the peak service costs of $2,300,000 would result in the much higher service/exports ratio of some 17%. Furthermore, when vie~dng Ecuador's external service costs in relation to its U. S. exports alone, it is seen that this ratio is some two to three times greater than is the case when Ecuador's total exports are used~ The relevancy of using the U. S. export totals must be taken into consideration in the present era of inconvertible currenCies.1! l/ That the "old" debt is largely Britis~owned does not affect the fact that the bonds are denominated in, and must be serviced in. dollars.