Feb. 14 (Bloomberg) -- Ecuadorean President Rafael Correa, who is considering defaulting on the country's $10 billion in international debt, is turning to Venezuela's President Hugo Chavez to cover an expected budget deficit this year.
Ecuador is short of funds to make a Feb. 15 interest payment on its benchmark bonds and will take advantage of a 30- day grace period, Deputy Finance Minister Fausto Ortiz said this week. Correa, 43, will send officials to Caracas Feb. 21 to discuss what kind of backing Venezuela can offer, Ortiz said.
``The intention is to go to Caracas to see exactly what the conditions are, to see if it involves buying bonds,'' Ortiz told reporters in Quito. ``We'll have to see exactly what the conditions of the financing are.''
For Chavez, supporting Correa's socialist government would match efforts to bolster other regional allies as he seeks to expand his reach and diminish U.S. influence. In the past year, Venezuela bought bonds from Argentina and jointly issued international bonds, which allowed the country, after a debt default in 2001, to raise funds in U.S. dollars.
``They're not sure what kind of debt restructuring proposal they'll offer. One of the first steps has got to be to cement support from Venezuela,'' said Gianfranco Bertozzi, a Latin America economist at Lehman Brothers Holdings Inc. in New York.
Ortiz said on Feb. 12 that the government is studying the composition of its debt and though payments are budgeted for this year, the country won't honor any debt found to be `illegitimate.''
Bondholders
Support from Venezuela for Ecuador could come in the form of assistance funneled through a third-party such as the Andean Development Corporation, loans at a favorable rate, or even an agreement to buy Ecuadorean bonds, Bertozzi said.
``If Ecuador defaults, it would be the first time a government does so out of a change in willingness to pay,'' he said. ``Normally, when you go to the negotiation table, there's recognition that there's no money,''
Ecuador's Finance Minister Ricardo Patino last month said the government may pay foreign creditors as little as 40 cents on the dollar to free up funds for heath care and education. Last month, the government doubled a cost of living subsidy for the elderly and disabled at a cost of up to $400 million. Correa has also promised increased housing assistance for the poor.
Default Threat
Default threats sent Ecuador's bonds to a 2 1/2 year low in January and caused Moody's Investors Service and Standard & Poor's to cut the country's credit rating.
Ecuador's 10 percent bonds due in 2030, the most traded in international markets, rose 1.85 cents on the dollar to 83.35 yesterday, pushing the yield down 0.29 percentage point to 12.16 percent, according to JPMorgan Chase & Co. The bond is up from 67 cents on the dollar Jan. 23.
``It's still not fully clear what the government strategy is with regard to their debt,'' Credit Suisse economist Carola Sandy said in a phone interview from New York. ``All the recent statements suggest that the probability of an outright default is declining.''
The bond's rise over the past three weeks has been fueled by speculators, said Raphael Kassin, who helps manage about $8 billion in emerging market fixed-income securities for ABN Asset Management in London. Kassin, who hasn't owned Ecuadorean bonds since 2003, isn't convinced.
``If there is a president who says he will default, what else can I expect,'' he said. ``I'm an investor who is running client money and my clients don't want me to take that kind of risk.''
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