By Naomi Mapstone in Lima
Financial Times - UK November 16 2008
Rafael Correa, Ecuador's leftwing president, has heightened fears that the Andean nation will default on parts of its $10bn foreign debt, saying an internal audit due this week will determine if the debt is "illegitimate".
"If there are sufficient grounds for illegitimacy, we won't pay this debt," Mr Correa said in an address at the weekend.
The preliminary report of Ecuador's debt-audit commission highlighted "terrible" irregularities with the management and renegotiation of the country's debt by previous administrations that amounted to "a real robbery for the country", Mr Correa said. The final report is being published on Thursday.
"We are not playing around. If there is sufficient basis to not pay this debt for being illegitimate, that's what we'll do," he said.
Ecuador last defaulted on its debt in 1999, but Mr Correa, an economist, has repeatedly threatened further defaults. In February last year, he delayed a $135m bond payment using a similar threat to default - only to make the payment at the last minute.
Markets had already reacted strongly to Ecuador's announcement on Friday that it would delay a $30.6m payment on its 2012 bond and use the time to consider whether there is a legal basis for classifying the debt as illegitimate.
Standard & Poor's and Moody's slashed Ecuador's credit rating, noting that while the oil-producing nation has been hit by price falls, it was "unwillingness" to pay, rather than any lack of capacity, that lay behind the delay in the bond payment.
Despite this, analysts raised fears over other resource-reliant emerging-market economies amid the commodity and global financial downturn.
Argentine bonds, vulnerable because of the country's recent history of default, fell again on Friday after Ecuador's announcement.
Copyright The Financial Times Limited 2008
http://www.ft.com/cms/s/0/12dd0660-b42f-11dd-8e35-0000779fd18c.html
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