Ecuador to miss foreign debt payment

The Associated Press

November 14, 2008 at 3:43 PM EST

QUITO — Ecuador will delay a $30.6-million (U.S.) interest payment on its foreign debt while it investigates signs of lawbreaking in the contracts, the finance minister said Friday, prompting a quick and negative reaction in bond markets.

Finance minister Maria Elsa Viteri said Ecuador won't make Saturday's payment, and is instead invoking a 30-day grace period while it reviews a presidential commission's audit of the contracts for the 2012 bonds.

After finding “serious indications of illegality,” Ms. Viteri said the government decided to wait for Monday's publication of the commission's 30,000-page report, and will work with a panel of international lawyers to determine how to proceed “in favour of sovereignty, justice and legality.”

She stressed that Ecuador can pay the debt, but markets reacted sharply, increasing yields and lowering prices on Ecuadorean bonds — a sign that the financial world sees Ecuador as an increasingly risky bet.

Debt rating agency Standard & Poors of Friday lowered the country's rating three notches, citing “severe uncertainty” on foreign debt.

S&P now rates Ecuador's credit at triple-C-minus, and says that if the government shows any signs of wanting to restructure its debt during the next 30 days its rating will be lowered even more, to what it calls “selective default.”

Ecuador President Rafael Correa has given the markets reason for concern, warning that he could forego debt payments if oil prices keep dropping. Oil is Ecuador's top income source.

Ecuador's Global 2012 bonds are worth $1.25-billion, and require twice-yearly 12 per cent interest payments of $30.6-million. The country's total foreign debt is roughly $13.1-billion — an amount equal to nearly 27 per cent of Ecuador's gross domestic product.

Ramiro Crespo of the Quito-based Analytica Securities investment bank told The Associated Press that what he's seen of allegations of contract irregularities doesn't justify calling the debt illegitimate.

“This will raise Ecuador's risk,” Mr. Crespo said, “helping speculators and hurting investors long term.”