Ecuador will not write off $1.1 bln cenbank debt

By Carlos Andrade

QUITO, June 25 (Reuters) - Ecuador will not write off a $1.1 billion debt owed to the central bank as previously offered in a new banking bill, but will restructure it instead, according to the president's partial veto of the legislation.

President Rafael Correa had surprisingly included scraping the debt in his original banking bill that aims to boost state control over the banking sector.

His original bill was watered down by Congress, and as a result the bill does not completely eliminate the government's obligation on the debt. Instead, Congress' version of the bill proposes a mechanism where the interest payments on that debt would be spent on social projects such as schools and hospitals.

The elimination of those bonds has long been a pledge of Correa who calls them "illegal" debt and wants to channel those resources to social projects in the poor Andean nation.

"The debt restructuring should be the result of an agreement reached by the creditors and the debtor," said Correa's partial veto draft document.

It is the first time Correa's government has mentioned the need to reach an agreement with creditors for a restructuring.

Correa, a former economy minister, has worried Wall Street with pledges to not pay "illegal" foreign debt, which means debt that was contracted by past corrupt governments.

To help depositors during a series of bank collapses in 1998, the government issued the debt, known as AGD bonds, that the central bank bought.

Congress has 30 days to approve Correa's partial veto or stick to its changed version.