Ecuador Default--Good News or Bad?

Ecuador Default

An International Living Postcard

Last week, Ecuadorian President Rafael Correa fulfilled a two-year pledge to default on debt he calls “illegitimate.”

On Dec. 12 he announced that Ecuador wouldn’t make a $30.6 million interest payment due the country’s three dollar-denominated bonds, with a total face value of $3.9 billion.

The bonds were “always structured for the benefit of the creditors, trampling on the national interests, dignity and sovereignty of our countries,” Correa told reporters in Guayaquil. “It is now time to bring in justice and dignity.”

Or is it just time to stiff your creditors, as Ecuador has done seven times in its history since independence?

And what does it mean for expats living and owning property in Ecuador? Is a new era of cheap property and even cheaper cost of living in the offing?

Here at International Living, Ecuador is high on our radar, and as soon as Correa made his default announcement, the email discussion started.

Ecuador Default--IL's Expert View

Lee Harrison, one of IL’s original Ecuador correspondents, was living in Cuenca, Ecuador, in 1999, when the country defaulted the last time and made the U.S. dollar the national currency, getting rid of the sucre.

“Prices dropped then,” Lee says, “but that was due mainly to currency issues. The sucre went through an incredible inflation before it was pegged to the dollar and dropped. The result was that everyone in Ecuador instantly lost 80% of the value of their money.

“Today, it’s different. Ecuadorians won’t suffer the hardship they did in 2000 with the combined default/devaluation/dollarization. This time, their currency can’t be devalued, and they won’t lose their savings. Prices may not go down, but Ecuadorians will be a lot happier than they were in 2000.”

Suzan and I are hoping so…we plan to spend part of each year up in Ecuador’s highlands.

“If you look at what happened in Argentina in 2001 and 2002,” says Suzan, “that default period was the best time to buy property in Argentina. I think the same may happen in Ecuador...next year will prove to be a very good time to buy property. And Ecuador has something that Argentina doesn't...some very beautiful beaches, and the best weather in the world.”

That’s the view of Ronan McMahon as well, our friend from Pathfinder Real Estate.

“What Ecuador has going for it today is exactly the same as it was before this latest default,” says Ronan. “The default will hurt Ecuador’s access to infrastructure loans, but nobody goes to Ecuador for the infrastructure. They go for the incredible weather, the beautiful beaches and mountains, and the low cost of living.”

Ronan’s co-worker, Margaret Summerfield, agrees.

“Ecuador’s biggest plus right now is value--great prices for pure beachfront, and remarkably low cost of living. I can’t see anything in this default that will change those things significantly.

Ecuador Default: What Will it Mean For American Expats?

Of course, with the dollar as its currency, Ecuador is exposed to the same exchange rate fortunes as the U.S., and the near future may not be bright for the greenback. But a falling dollar makes Ecuadorian exports cheaper, and hence more attractive. And they do have a lot of tuna, shrimp, and bananas.

So the consensus of opinion seems to be that to be that, even if prices don’t fall dramatically and infrastructure work is stalled, the Ecuador value proposition is as strong as ever. It was one of the most beautiful and affordable places in the hemisphere before this latest default, and that shouldn’t change.

In short, nobody has a crystal ball, but it looks like Ecuador should remain the best value in the Americas for expats.

Stay happy and healthy,

Dan Prescher
Publisher, International Living

For more IL articles on Ecuador, see:

Vicabamba, Ecuador: Four Riverfront Lots for Sale

Ecuador Beach Property: A $50,000 Beach Condo