Ecuador: The Finance Minister, the Investment Banker, the Scandal, and Me

Political scandals are a dime a dozen in Ecuador, so the latest one hasn't received a lot of attention here in the US. Bloomberg's on it, however, with a story headlined "Ecuador Prosecutors Probe Patino, Banker Meeting".

Patino is Ricardo Patino, the Ecuadorean finance minister. The banker is Carlos Abadi, a New York-based investment banker who specializes in Latin America. And the meeting took place at the beginning of February, in Patino's office, and was caught on videotape.

A research note from Analytica Investments in Quito explains what the scandal is all about:

After the video was aired by Ecuadorian television on Monday May 21st, Patino admitted that he met with "two bondholders" and ex Economics Minister Armando Rodas to discuss the possibility of manipulating the debt market by announcing a moratorium/default and then complying with
payments.

Patino says, implausibly that he filmed the meeting on purpose. He wanted to "expose the shady workings of the global debt market," it would seem, by capturing on tape "debt negotiations with a transnational company that had offered bribes".

The propsed scheme was actually very simple, as Patino himself has described it: Patino would declare that he was minded to default on Ecuador's global bonds. As a result, the value of Ecuadorean credit-default swaps (CDS) would soar, and an investment banker could make a lot of money by writing insurance against Ecuador defaulting. Then, Ecuador makes its coupon payment in full and on time, meaning that anybody who had written that insurance would have to pay out nothing.

Is that exactly what happened? Let's just say it's consistent with events as they played out. Just days after the taped meeting, the finance ministry announced that Ecuador would not pay its coupon on time. A few days after that, the coupon was paid, in full and on time, in a decision which was described as "erratic, arbitrary, capricious and manipulative".

One interesting twist to the story is that as far back as December I posted a blog entry at rgemonitor.com saying that "a devious Ecuadorean finance minister" could make quite a lot of money by manipulating the CDS market. And it just so happens that Carlos Abadi is on the advisory board of RGE, where I was blogging. (I've never met him, however, and in fact know very little about him.)

And at roughly the same time as the meeting between Patino and Abadi occurred, I put up an entry at felixsalmon.com entitled "Ecuador: Is the government manipulating the bond market?". So none of this comes as any surprise to me, although the fact that Carlos Abadi seems to have been personally involved did raise my eyebrows somewhat.

Abadi denies that he's done anything untoward:

Abadi & Co. said in a statement e-mailed from New York that its bankers met with Patino as part of a round of gatherings that the Ecuadorean government held with financial institutions to trim debt servicing costs. Abadi Chief Executive Carlos Abadi, reached by telephone, declined to comment beyond the statement. He confirmed that he and one of his colleagues participated in the meeting.
Abadi's statement said the partial release of the video "completely removed the context of the meeting," and called for the release of the entire video, saying it would "confirm the veracity of their affirmations."

Abadi's representative in the meeting, former economy minister Rodas, has been a bit more voluble in defending himself along the same lines, but so far nothing that he or Abadi has said can really explain why the tape shows them talking about how much Ecuador's spreads could rise if Patino scared the markets by talking about a potential default.

Abadi must be worried right now: if he's being accused of bribing foreign officials, the US authorities might start getting interested, and my guess is that there's a real chance of him losing his banking license. What happens in Quito, it seems, doesn't always stay in Quito.

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