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Friday, November 21, 2008

Ecuador files suit to suspend Brazil 'illegal' loan

By Alexandra Valencia
QUITO, Nov 20 (Reuters) - Ecuador filed an international lawsuit to suspend payment on a loan owed to a Brazilian government bank, charging that the credit's terms are unlawful, a top government official told Reuters on Thursday.

News on the lawsuit comes days after Ecuadorean President Rafael Correa raised the specter of default by threatening not to repay debt considered to be illegal or riddled with irregularities when contracted by past governments.

A popular leftist, Correa has often threatened measures against debtholders as part of his campaign to shore up state control of the economy and key industries such as oil and mining he says have been ravaged by foreign investors.

Correa is expected on Thursday to announce the results of a year-long debt audit that found indications of illegality in much of the country's $10 billion foreign debt.

Jorge Glas, head of a government fund handling the lawsuit, said the loan granted by BNDES, Brazil's state development bank, was linked to a construction company that was expelled from the country over a contractual dispute.

"We are asking (for) precautionary measures, which includes the suspension of the (loan) payment," said Glas, adding that the $320 million loan had indications of illegalities.

"This is not a diplomatic matter," he said in an interview with Reuters. "This is a financial matter on a contract from a bank in Brazil, which simply has illegal flaws."

As Wall Street braced for his debt announcement, Correa said his government will seek international credits, but doubts the financial markets will lend to his country since he has threatened to default on some bonds.

"Everybody knows that we are not going to get credits from the international financial sector," Correa said while announcing a package of measures to counter the effects of a global slowdown. "The financial sources that are open for us are the multilateral and bilateral."

In September, Correa threatened not to repay the BNDES, holding that the loan was granted to Brazilian top construction firm Odebrecht to build a plant and not to the government.

Ecuador's spat over the Brazilian loan has frayed ties with ally Brazil who is a potential source of credit as a world global crisis drags down oil prices.


The debt audit panel says it has found evidence of unlawful terms or practices in most of Ecuador's $10 billion foreign debt, including its dollar-denominated bonds maturing in 2012 and in 2030 .

Auditors told Reuters they did not have enough time to review the the 2015 global bonds, but could ask for an extension to probe them. The three global bonds -- maturing in 2012, 2015 and 2030 -- total around $3.8 billion.

The report does not recommend the suspension of payments of illegal debt, although, in preliminary findings the panel had called on the government to halt repayments.

Many analysts see Correa's debt threats as a bold attempt to renegotiate the terms of the global bonds.

OPEC member Ecuador is facing a rapid decline in revenues as the price of its main export, crude oil, slumps on world markets.

Pegged by Wall Street rating agencies as among the least credit-worthy nations in Latin America, Ecuador last default was on $5.8 billion in bonds in 1999, also amid a sharp fall in oil prices.

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