Will Ecuador return to Wall Street?

ECUADOR - In Brief 05 Jun 2014 by Magdalena Barreiro

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The operation between the Central Bank and Goldman Sachs involving gold reserves raised a wave of speculative comments. Here is a summary of the operations according to information provided by the BCE general management. The BCE will deposit 465,619 troy ounces of gold in a foreign account managed by Goldman Sachs totaling $579.8 million at a settlement price of $1.299 per ounce. In return, Goldman Sachs has committed to pay an annual return of 85 basis points for the use of this gold --an estimate of $16 to $20 million per year. In the event of a price increase of 20% or higher over the initial price, the return will increase to 105 bp. Goldman will guarantee the operation with financial instruments of investment grade corresponding to 110% of the above amount and deposited in a trustee bank. The transaction matures on February 20, 2017 and would leave the level of international reserves unchanged as a financial instrument in the form of an OTC derivative issued by Goldman will replace the gold. The Central Bank could make this instrument effective within 7 days providing "a high level of liquidity to the reserves" according to the management. The second part of the agreement involves a loan of $400 million granted by Goldman to the Ministry of Finance at a nominal annual rate of 4.3% (or 3.82% effective rate). To complete the operation, the Central Bank will issue a credit default swap that could be executed not only in the event of default of this loan but of any other international obligation. In our opinion, this transaction provides the Republic with lower financial costs that the Chinese loans backed up with oil. It also establishes protections that could work a...