Ecuador's Bonds Fall After Patino Says Government May Default

By Lester Pimentel

Aug. 18 (Bloomberg) -- Ecuador's bonds tumbled after Reuters reported the head of a commission auditing the country's foreign debt said the government has sufficient evidence to default on ``illegitimate'' debt.

The yield on Ecuador's benchmark 10 percent bonds due in 2030 jumped 61 basis points, or 0.61 percentage point, to 11.65 percent at 4:36 p.m. in New York, according to JPMorgan Chase & Co. The bond's price plunged 4.5 cents on the dollar to 87 cents.

Minister of Politics Ricardo Patino said creditors would be forced to accept the government's decision to cease payment on debt ``even if some don't like it,'' Reuters reported Aug. 15. President Rafael Correa has roiled debt markets with threats to default since he took office last year. The debt commission he appointed will announce it recommendations next month, Reuters said.

``The market is focused on the mantra that the government has been echoing that they will not pay illegitimate debt,'' said Gianfranco Bertozzi, an economist at Lehman Brothers Holdings Inc. in New York. ``The tone was not surprisingly aggressive with regard to future payment of debt.''

Telephone calls by Bloomberg News to Finance Ministry spokesman Victor Carvajal and Santiago Diaz, Patino's spokesman, weren't immediately returned.

The risk of owning Ecuador's bonds rose to the highest since July 29. Five-year credit-default swaps based on the country's debt climbed 10 basis points to 7.10 percentage points, according to CMA Datavision. That means it costs $710,000 to protect $10 million of the country's debt from default.

`Overdone'

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.

``The government continues to take a very ambiguous stance on willingness to stay current on its external debt service obligations appealing recurrently to subjective and dogmatic language on this issue,'' Alberto Ramos, an economist with Goldman Sachs Group Inc. in New York, wrote in a report.

The extra yield investors demand to own Ecuador's bonds rather than Treasuries widened 10 basis points to 6.97 percentage points, according to JPMorgan's EMBI Plus index.

The move in Ecuador's bonds is ``overdone,'' Lehman's Bertozzi said. The current levels offer a ``buying opportunity'' for investors because the risk of default this year is low, he said.

Emerging-market bonds overall yielded 3.02 percentage points more than Treasuries, up 2 basis points from Aug. 15.