Ecuador May Default on $30 Million Interest Payment

By Lester Pimentel and Daniel Cancel

Nov. 14 (Bloomberg) -- Ecuador said it may default on a $30 million interest payment as a tumble in oil erodes export receipts, putting President Rafael Correa on the verge of fulfilling a two-year-old threat to repudiate the country's debt.

Correa will use the 30-day grace period on the bond payment, which is due tomorrow, to analyze legal opinions, Finance Minister Maria Elsa Viteri said at a news conference in Quito.

The price on the $510 million bond maturing in 2012 plunged to as low as 14 cents on the dollar, sending yields over 100 percent, as investors braced for the first sovereign default since the global financial crisis deepened in September. Standard & Poor's cut the country's rating three levels today to CCC-.

``It's up to the president to analyze the alternatives,'' Viteri said. ``All options are on the table.''

Correa, a 45-year-old economist who laces his speeches with phrases in the native Quechua language, has been threatening since the 2006 campaign to halt payments on debt he determines is ``illegitimate.'' In September, he called a debt auditing committee's preliminary findings ``harrowing,'' saying some of the obligations were fraudulently contracted.

``We're waiting for the opinions, recommendations so that the president can make a truly positive decision,'' Viteri said.

Ecuador's finances have come under strain as oil, which accounts for 60 percent of the country's exports, has plunged 61 percent from a record high in July to $57.23 a barrel.

`Burning Reserves'

Ecuador, which last defaulted in 1999, needs an oil price of $95 to cover all the spending in its budget and a price of $76 to avoid depleting its $6.3 billion of foreign reserves, according to Barclays Capital Inc.

``They are burning reserves,'' said Eduardo Levy-Yeyati, an emerging-markets analyst at Barclays. ``The question is whether they will keep paying if oil prices don't recover.''

Ecuador's foreign debt totaled $10 billion as of September, according to Goldman Sachs Group Inc. That's equal to less than 25 percent of its $44 billion annual gross domestic product.

Correa, who earned his Ph.D. at the University of Illinois at Urbana-Champaign, won a landslide victory in November 2006 after promising to rewrite the constitution and boost spending on the poor. He said in September that he'd suspend debt payments before trimming spending on education and health care.

``The willingness to pay is obviously not there,'' said Alberto Bernal, an emerging-markets strategist for Bulltick Capital Markets in Miami.

`Extreme' Move

While the drop in oil has crimped revenue, the government still has enough money to service its debt, Bernal said. Viteri said at the news conference that the government has the cash to make the $30 million payment on time.

``The government still has liquidity,'' Bernal said. ``Not paying $30 million sounds extreme. It's too early to kick the table.''

The yield on the 2012 bonds, which were issued as part of a restructuring in 2000, surged 13.29 percentage points to 82.79 percent at 2:20 p.m. in New York, according to JPMorgan Chase & Co. The yield climbed to as high as 108 percent earlier today.

The bonds' price sank 5 cents on the dollar to 20 cents after plunging 17 cents yesterday. The bond traded at 99.5 cents on Sept. 8, a week before the collapse of Lehman Brothers Holdings Inc. deepened the global economic slump that has throttled demand for crude oil.

Correa's government has used this tack before, saying in February 2007 that it would wait till the 30-day grace period to make an interest payment. Correa then reversed course, opting to make the $135 million payment on time.

``Ecuador is the only country that has explicitly said it might not repay debt,'' said Cathy Elmore, who manages $700 million of emerging-market debt at WestLB Mellon Asset U.K. Ltd. in London. Still, she said she was surprised by today's move. ``I don't think anyone expected it right now. It seems odd to me. Their fiscal situation at the moment is okay.''