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Wednesday, July 09, 2008

Ecuador's Dollar Bonds Plunge as Finance Minister Ortiz Quits

By Lester Pimentel

July 8 (Bloomberg) -- Ecuador's bonds tumbled after Finance Minister Fausto Ortiz resigned, renewing concern the government may default on about $10 billion of debt.

The extra yield investors demand to own Ecuador's debt rather than U.S. Treasuries jumped 53 basis points, or 0.53 percentage point, to 6.64 percentage points at 4:18 p.m. in New York, according to JPMorgan Chase & Co.'s EMBI Plus index. The so-called spread is the widest since March 20.

Ortiz resigned after government officials decided last night to seize 195 companies, including television stations, in a bid to collect debts stemming from a 1990s banking crisis, Ecuavisa TV reported. Ortiz had allayed investors' concern last month that Ecuador would default after President Rafael Correa threatened to annul debt deemed ``illegitimate'' by an auditing commission.

Wilma Salgado, the head of Ecuador's Deposit Guarantee Agency, was named finance minister today. Victor Carvajal, a spokesman at the ministry, declined to comment on why Ortiz resigned.

``Ortiz was quite market friendly,'' said Claudia Calich, who manages $1 billion in emerging-market debt for Invesco Inc. in New York. Salgado ``is believed to be less market friendly than Ortiz. She will have to express her view on debt servicing.''

The yield on Ecuador's 10 percent bonds maturing in 2030 climbed 49 basis points to 10.84 percent, according to JPMorgan. The bond's price tumbled 4 cents to 93 cents on the dollar.

`Most Pragmatic'

Ortiz had worked to damp default speculation since he replaced Ricardo Patino as finance minister a year ago. The benchmark 2030 bonds surged 4.75 cents on the dollar on July 25, the day Correa announced Ortiz as minister. Patino had threatened to pay back just 40 percent of the country's debt days after Correa took office in January 2007.

``Ortiz was the most pragmatic and market friendly voice within the Correa administration,'' Alberto Ramos, an economist at Goldman Sachs Group Inc., said in a note to clients.

His departure ``increases the risk that based on subjective claims of `illegitimacy,' the government could feel tempted to pursue market unfriendly measures on external debt,'' he wrote.

Correa's comments last month revived default concern. Ortiz sought to downplay that threat a week later when he told investors at the Harvard Club in New York that he didn't ``see the process leading us to a potential default.''

Credit-Default Swaps

Ortiz said in a Bloomberg Television interview after his speech that day that there's a less than a 10 percent chance the government will halt debt payments.

The risk of owning Ecuador's bonds soared to the highest since April 19. Five-year credit-default swaps based on the country's debt jumped 72 basis points to 6.42 percentage points, according to according to CMA Datavision. That means it costs $642,000 to protect $10 million of the country's debt from default.

Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent.

Emerging-market bonds yielded 3.07 percentage points more than Treasuries today, up 3 basis points from yesterday.

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