By Nathan Vardi
GMO Trust, the Boston investment company co-founded by prominent investor Jeremy Grantham, has sued the Republic of Ecuador in Manhattan’s federal court over the default of Ecuador’s foreign bonds in 2008, setting the stage for a second big U.S. court fight between a large U.S. financial firm and a sovereign South American nation.
Ecuador President Rafael Correa declared that Ecuador’s foreign debt was “illegal” and “immoral” and refused to make interest payments on $3.2 billion of foreign-denominated bonds in 2008, causing the South American country to default. The GMO Emerging Country Debt Fund is the beneficial holder of some of those bonds that have a face value of $15.9 million, according to the lawsuit GMO filed in federal court in Manhattan on December 12. Grantham, Mayo, Van Otterloo, is the Boston-based investment adviser to GMO Trust and oversees $120 billion in assets.
“Unlike other notable sovereign defaults, Ecuador’s was not driven by a national economic or debt crisis,” GMO says in its complaint. “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.” GMO added: “Ecuador has made no attempts to deny or justify its default.”
GMO’s decision to sue Ecuador for breach of contract in U.S. federal court follows hedge fund billionaire Paul Singer’s legal efforts against Argentina, in which an affiliate of Singer’s Elliott Management hedge fund firm has pursued litigation in the U.S. federal courts that ultimately caused Argentina to default on its debt this year.
Ecuador’s so-called selective default in 2008 has long been viewed as a big victory for the country. A self-described socialist, President Correa carefully carried out his debt repudiation policy by ordering that payments not be made on $3.2 billon of Ecuador’s foreign bonds during the global financial crisis, some two years after he started threatening to take such an action. Ecuador then in 2009 repurchased most of those foreign bonds, about 91% of them, with cash and at a massive discount—35% of face value.
Ecuador’s default did not completely tarnish its reputation with foreign investors in the long term. The country returned to the bond markets earlier this year, selling $2 billion of 10-year dollar-denominated bonds carrying yields of some 7.95%. In the weeks leading up to the new bond issuance, Ecuador reached an agreement with New York’s Greylock Capital Management that saw the country repurchase 80% of the remaining defaulted bonds. Owners of the new bonds include funds managed by BlackRock and Franklin Templeton. Separately, Goldman Sachs recently lent Ecuador $400 million.
Still, while most of the holders of the defaulted bonds have taken the payment offered by Ecuador, GMO has continued to hang onto the vast majority of its holdings of Ecuador’s defaulted bonds that mature in 2030. In its complaint, GMO tried to distinguish itself from so-called vulture funds, by saying “the vast majority of its holdings have continually consisted of the bonds acquired in 2000,” when the bonds were issued. The Boston fund firm says in its complaint that it holds more than 25% of the outstanding principal of the bonds when Ecuador’s holdings are excluded, meaning GMO is entitled to accelerate the entire principal amount of the bonds.
GMO claims in its complaint that the federal court in Manhattan has jurisdiction over Ecuador because the country waived sovereign immunity under the documents governing the issuance of the defaulted bonds, which stated that any legal action related to them could be taken to any federal or state court in New York City. In October, GMO sent a letter to the trustee of the bonds instructing the trustee to declare the principal amount of the bonds due and payable.
A spokesman from GMO did not quickly respond to requests for comment. Ecuador’s embassy in Washington D.C. did not quickly respond to a request for comment.