Correa warns of debt default, pending audit

QUITO, Ecuador, Nov 16, 2008, IHT: Ecuador will default on part of its foreign debt next month if a government audit determines the debt contracts were unlawful, President Rafael Correa said Saturday.

The country delayed paying $30.6 million in interest due on 2012 bonds this weekend until the results of a yearlong investigation into the conditions of the bonds' sale are released Thursday.

A decision to default or not will be made before Dec. 15, the expiration date for a one-month grace period on Ecuador's interest payments, Correa said.

"If there are sufficient grounds for illegitimacy, we won't pay this debt," Correa told his weekly radio program, saying Ecuador would likely bring any irregularities the audit uncovers before an international court.

Correa said there were "serious legal questions" about the debt, which was renegotiated in 2000 under terms he called "a real robbery for the country."

Correa has suggested that previous governments mishandled debt negotiations and abused privileged information for personal financial benefit. He ordered the audit of the debt contracts last year.

Correa ran for president in 2006 vowing to default on Ecuador's foreign debt and use the money to fund anti-poverty programs instead. While he has not yet acted on that threat, he warned falling oil prices may soon force his hand. Oil is Ecuador's top source of foreign income, and prices have dipped 60 percent since July.

The move to suspend interest payments, announced Friday, sent Ecuador's benchmark bonds plummeting. It will likely freeze already tight credit flows to Ecuador and deter scarce investor interest in its oil and mining sectors.

Standard and Poor's slashed Ecuador's long-term debt rating by three notches to CCC- on Friday, threatening to cut it further if Correa's government hints at a restructuring.

But Correa was not deterred.

"That the bonds fall and the country risk rises isn't of the least bit of interest to us," he said Saturday. "These things can't be left without punishment."

Ecuador has sold three types of bonds, which are due in 2012, 2015 and 2030 and worth a total of $13.1 billion, about 21 percent of gross domestic product. The 2012 bonds require twice-yearly interest payments of $30.6 million.

In 2000, President Gustavo Noboa issued the bonds due in 2012 and 2030 to refinance so-called Brady bonds issued in 1994.