September 19, 2012 / 4:22 AM / 6 years ago

UPDATE 1-Tiny Belize set to default, hopes to restructure debt

* Failure to pay would mark default on about half of govt debt

* No consensus with creditors on bond exchange offer

By Louise Egan

MEXICO CITY, Sept 19 (Reuters) - Belize will not make a crucial Wednesday deadline for making a payment on its sovereign bond, the head of the government’s debt restructuring team said on Tuesday, effectively paving the way for a formal default on $550 million in debt.

The tiny Central American nation in August missed a $23.5 million interest payment on its so-called superbond, saying it could not afford the rate, which had increased to 8.5 percent from 6 percent. That move set the clock ticking on a 30-day grace period that ends Sept. 19.

Failure to pay on Wednesday would mark a default on about half of the government debt.

“Belize does not have the capacity to repay on the current terms - it did not have this capacity on August 20, so that condition can only change with debt relief,” Mark Espat, who is negotiating with bondholders on behalf of the Belize government, told Reuters.

While the amount of distressed debt is tiny by global standards, one analyst called the restructuring terms offered among the worst in recent times with potential repercussions beyond Belize.

Espat said there is no clear consensus so far with creditors on the terms of a debt exchange offer.

“The government expects negotiations to proceed after the expiration of the 30-day grace period,” he said. “Transparent and good faith negotiations is the only viable pathway for a fair resolution of Belize’s unsustainable debt burden.”

Belize said last month it was confident it could successfully negotiate a restructuring of the superbond and laid out three possible scenarios for doing so, including a steep haircut on the amount of principal to be repaid and extending the maturity date. [ID: nL2E8J9JPE]

Espat said these were not final offers and that the country would welcome counter proposals as long as they match its ability to pay.

Ratings agencies and analysts expect bondholders would likely face severe losses and may fight for better terms.

Joe Kogan, head of emerging markets strategy at Scotiabank in New York, suggested that Belize was taking its cue from larger Latin American players like Ecuador and Argentina in its aggressive negotiations with creditors. He believes investors will get as little as 20 cents for every dollar invested.

“We have had a number of cases over the last decade of sovereign countries being very aggressive in the way they negotiate with bondholders and largely getting away with it,” he said.

Investors in the future may stay away from countries that have few foreign ties and don’t really need access to global capital markets, he said.

“There’s a subset of small countries where the costs of defaulting may be lower than in places that are very open and investor friendly and are issuing all the time,” Kogan said.

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