GMO Trust Files Lawsuit Against Ecuador Over 2008 Bond Default

U.S.-based hedge fund GMO Trust is suing Ecuador in regard to bonds the country defaulted on back in 2008. GMO Trust is a Boston firm co-founded by prominent investor Jeremy Grantham.

GMO is the second hedge fund to sue a nation that has defaulted on its bonds in U.S. courts. Paul Singer’s Elliott Management hedge fund firm has successfully pursued litigation against Argentina in the U.S. federal courts. That said, while Elliot won a judgement against Argentina in court and used to force the country into default on other bonds, it still has not collected a dime, and some predicted it could lead to other suits, such as the one today.

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Background on Ecuador bond default

Back in 2008, the President of Ecuador, Rafael Correa, declared that Ecuador’s foreign debt was “illegal” and “immoral”. He refused to make interest payments on $3.2 billion of foreign bonds, causing the country to default on those bonds.

According to a filing in the lawsuit GMO filed in federal court in Manhattan on December 12, GMO’s Emerging Country Debt Fund is the holder of some of those bonds worth $15.9 million.

Ecuador’s “selective default” in 2008 ended up working out well for the country.  A socialist, President Correa  carried out his debt repudiation policy by ordering the central bank to not make payments on $3.2 billion of Ecuador’s bonds during the global financial crisis. The country continued to honor its other debt. Eighteen months later, Ecuador repurchased 91% of the defaulted bonds with cash for around 35% of face value. GMO Trust chose to not participate in the 2009 deal.

Statement from GMO Trust complaint

“Unlike other notable sovereign defaults, Ecuador’s was not driven by a national economic or debt crisis,” GMO notes in its filing. “Tellingly, despite the purported immorality and illegality of its entire stock of debt, Ecuador continued to pay on its remaining issuances aside from the $3.2 billion in defaulted 2030 and 2012 bonds.” The filing also pointed out that “Ecuador has made no attempts to deny or justify its default.”