Ecuador's Bond Yields Fall Below Venezuelan Yields (Update2)

By Lester Pimentel

April 4 (Bloomberg) -- Yields on Ecuador's dollar- denominated bonds fell below those of Venezuela as Ecuadorean President Rafael Correa reins in a budget deficit while his ally Hugo Chavez ramps up spending.

Ecuadorean dollar bonds yielded 6 basis points less than Venezuelan dollar bonds on average at 12:44 p.m. in New York, according to data compiled by JPMorgan Chase & Co. Ecuadorean bonds yielded 7.48 percentage points more than Venezuelan bonds in December 2006, when Correa pledged before taking office to default on the country's ``illegitimate'' debt.

Correa, while using much of the same ``21st Century Socialism'' rhetoric that Chavez popularized, has done more to reassure bondholders than his Venezuelan counterpart. He backed off the default threats, boosted tax collection and cut the budget gap while Chavez increased spending three-fold over the past five years, sparking Latin America's highest inflation rate and shortages of everything from milk to cars.

``Chavez took the baton from Fidel Castro,'' said Tomasz Stadnik, who manages $2.6 billion of emerging-market debt at ABN Amro Asset in London. ``Correa is a more complex character to read. He's definitely not a revolutionary.''

Chavez, 53, said today he plans to nationalize the country's cement producers, a move that would affect companies including Cemex SAB of Mexico and Lafarge SA of France. Last year, he seized the country's biggest electric and telephone utilities.

Oil, Foreign Reserves

The move in yield spreads is surprising, given that Venezuela has about 25 times more proven reserves of oil, the biggest export from both countries, said Gianfranco Bertozzi, an economist at Lehman Brothers Holdings Inc. in New York. Venezuela also has more foreign currency reserves as well as other assets that the government could sell to pay debt should oil prices fall, he said.

``It would take a much smaller drop in oil prices to create a crisis for Ecuador,'' Bertozzi said.

Investors have paid little attention to those numbers, instead focusing on the different policy tacks of the two governments.

The spread on Ecuador's dollar bonds over U.S. Treasuries has dropped to 6.26 percentage points from 10.48 points in January 2007, the month Correa took office, according to JPMorgan. The spread on Venezuelan bonds has risen to 6.32 percentage points from a low of 1.82 percentage points in January 2007.

Ecuador's bonds have gained the most in JPMorgan's benchmark emerging-market debt index in that span, returning 50.5 percent. Venezuela's bonds have lost 12.9 percent, making them the second- worst after Argentina.

`Tragic Trio'

``Ecuador used to be part of the tragic trio that included Venezuela and Argentina,'' said Edwin Gutierrez, who manages about $5.5 billion of emerging-market debt for Aberdeen Asset Management Plc in London. ``It's one of my favorite picks. The fear of an unfriendly restructuring has faded.''

Venezuela's foreign debt is rated BB- by Standard & Poor's, three levels below investment grade, and B2 by Moody's Investors Service, five levels below investment grade. Ecuador's bonds are rated B- by S&P and B3 by Moody's, both six levels below investment grade.

Correa, a 44-year-old economist with a Ph.D. from the University of Illinois at Urbana-Champaign, won election in November 2006 by promoting his alliance with Chavez and pledging to rewrite the constitution to help bring about a ``just and socialist Latin America.''

Like Chavez, he lashed out at the U.S., calling President George Bush ``dimwitted,'' and threatened to sever ties with the International Monetary Fund and World Bank during the campaign. Chavez has dubbed Bush the ``devil'' and ``Mr. Danger.''

`A Pragmatist'

Correa, who laces his speeches with phrases in the native Quechua language, has been less radical since taking office. He scrapped pre-set spending items from the annual budget and raised income and inheritance taxes last year, steps that earned the backing of the IMF. Ecuador's Finance Ministry forecasts the budget deficit will narrow 18 percent to $605 million this year.

Correa's government said in January it won't join a military alliance against the U.S. proposed by Chavez. Correa has also refused to join ALBA, a trade group Chavez formed with Bolivia, Cuba and Nicaragua as an alternative to the U.S.-led Free Trade Area of the Americas. He called ALBA ``ambiguous'' in September, telling the Associated Press he didn't ``even understand it.''

``Correa is a pragmatist,'' said Werner Baer, an economics professor who taught Correa at the University of Illinois. Bear predicted in 2006 that Correa would back off the default threats after winning election. ``He is not as aggressive as Chavez, and his agenda is to govern and reform effectively. He is not using anti-Americanism as a tool.''

To contact the reporter on this story: Lester Pimentel in New York at o lpimentel1@bloomberg.net

Last Updated: April 4, 2008 12:45 EDT