Ecuador Bonds Slump as Investors Fear President Will Be Ousted

Ecuador’s bonds are sliding as President Guillermo Lasso stares down an impeachment trial, with Wall Street bracing to lose one of Latin America’s few remaining market-friendly leaders.

(Bloomberg) — Ecuador’s bonds are sliding as President Guillermo Lasso stares down an impeachment trial, with Wall Street bracing to lose one of Latin America’s few remaining market-friendly leaders.

Investors are already betting that Lasso will be removed from office less than halfway into his four-year term, accelerating a pivot toward a left-leaning administration. The latest collapse in market confidence came after the Constitutional Court said it will allow congress to seek Lasso’s ousting. 

“Impeachment was one of the scenarios investors were fearing,” said Sergey Goncharov, a money manager at Vontobel Asset Management in Miami. “The latest move by the Constitutional Court is certainly pointing toward its likelihood increasing.”

An opposition coalition of left-wing supporters of former President Rafael Correa, the conservative Social Christian Party and dissidents of center-left parties accuse Lasso of having negligently allowed corruption in the public administration.

Judges voted 6-3 to clear the way for the National Assembly to move ahead with an impeachment trial, the court said in a late Wednesday statement. 

Lasso has called the accusations unfounded and says they fail to meet legal grounds to impeach him. His administration said it respected the court, but disagreed with the ruling. 

“This decision in no way validates the arguments made by the legislature against the president,” according to an overnight statement, which cited errors and changes in the impeachment documents.

The first attempt to remove Lasso last June amid a violent Indigenous uprising obtained 80 votes. The legislature needs the votes of 92 of 137 lawmakers to replace him with Vice President Alfredo Borrero.

“It is likely the 92 votes threshold needed to remove President Lasso could be reached,” Citigroup Inc. strategists led by Dirk Willer wrote in a Thursday note to clients.

The impeachment drive gained traction after voters unexpectedly spurned Lassos’ proposed constitutional changes in February and voted to bolster the socialist opposition. 

While Barclays Plc. economist Alejandro Arreaza downplayed the risk of imminent default in Ecuador even if Lasso is impeached, the country’s inability to build political consensus and weak investor sentiment could make default a “self-fulfilling prophesy” as major payments come due after 2025.

The nation’s dollar notes maturing in 2030 were the worst-performing in emerging markets on Thursday, according to data compiled from a Bloomberg index. The debt slumped by as much as 4 cents to 44 cents, the lowest in almost six months. 

Investors demand an extra 20 percentage points in yield over comparable US Treasuries to hold the sovereign notes, according to JPMorgan Chase & Co. data — far past the threshold for debt to be considered in distress.

Still, Lasso has options. The 67-year-old president can step in at any moment to dissolve the National Assembly, triggering early legislative and executive elections.

Juan Fernando Flores, the leader of the president’s CREO party in congress, said Tuesday that Lasso’s priority would be to defend himself from the accusations rather than shutting congress. The whole impeachment process will take at least 45 days, he added.

If Lasso were to dissolve the National Assembly, he would be allowed to govern by executive decree, subject to review by the Constitutional Court. The hostile opposition has blocked most of his initiatives, including his attempts to attract more foreign investment through legal reforms. 

The impeachment vote “will not happen if President Lasso thinks he will lose,” said Siobhan Morden, managing director of Latin America fixed income strategy at Santander, via email. The ability for Lasso to govern via decree would afford him more flexibility in his policymaking, she said.

Indigenous leaders have warned they could take to the streets again if Lasso were to close congress. A March opinion survey by pollster Click Report said most voters rejected prominent politicians including Lasso, Correa, PSC leader Jaime Nebot and Leonidas Iza, president of CONAIE, Ecuador’s biggest Indigenous organization, by wide majorities.

For EMFI Group Limited analyst Melissa Evaristo, dissolving congress and early elections would be a “nuclear option.” 

It’s “within the realm of possibilities, even though most political actors still have incentives to try to avoid such a scenario,” she wrote in a note. 

–With assistance from Robert Jameson.

(Adds bond pricing, investor and analyst commentary throughout.)

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