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. Last Updated: 07/27/2016

Ecuador on Brink Of a Debt Default

RIO DE JANEIRO, Brazil -- Grappling with the worst national economic crisis in 70 years, Ecuador plans to renegotiate its foreign debt when a payment falls due next week but does not intend to default, the Latin American country said Monday.

In a brief statement issued in Quito, the Ecuadorean capital, Finance Minister Ana Lucia Armijo said the government of President Jamil Mahuad "will propose a coordinated restructuring, using market mechanisms" of the $6 billion in so-called Brady bonds the country owes. But she added that the government "will not in any way declare a unilateral moratorium regarding the payment of external debt."

The amount due at the end of this month is only $94 million, but fears of an Ecuadorean default have contributed to market instability throughout Latin America in the past week, even in much larger and more diversified economies such as Brazil, Mexico and Argentina.

No country has ever defaulted on Brady bonds. There is fear that a suspension of payment by Ecuador would deeply hurt the psychology of the market and lead to a withdrawal of foreign investment from Latin American countries. Such a withdrawal could create a new round of market instability and raise the cost of borrowing for all so-called emerging markets, damaging them further.

Brady bonds, named for Nicholas Brady, who was U.S. secretary of the Treasury in President George Bush's administration, were created in response to the debt crisis that Mexico and other Latin American countries faced in the late 1980s. They allowed 18 developing countries to package defaulted loans into new bonds that are backed by United States Treasury bonds.

The jitters about Ecuador's ability to pay its debts have been building for weeks but they grew acute Thursday, when Ecuadorean officials suggested they might be forced to seek a "deferral" of the payment due next Tuesday. Under the terms of a Brady bond deal negotiated in 1994, Ecuador has a 30-day grace period before it would formally be declared in default.

"We all know that under current circumstances it is not easy to pay our external debt, as we also have an internal debt," Modesto Correa, acting president of Ecuador's central bank, said Friday. "It's up to the finance minister to see whether we pay, not pay or defer our debt," he said.

In his weekly radio address to the nation and in other statements made over the weekend, Mahuad also sent mixed signals. While he emphasized that "Ecuador is not considering avoiding its commitments," he also said that he was "working so that Ecuador can pay what debt it can, as much as its economy can permit," through "market mechanisms that permit paying less for the debt."

A delegation from the International Monetary Fund flew to Quito last weekend to meet with Mahuad and other officials. Negotiations have been under way for a $400 million loan to help cover the country's credit needs over the next 18 months, but have been slowed by the unwillingness of Ecuador's National Congress, which is dominated by the opposition, to take action on matters such as tax reform, banking and government subsidies.

On Monday, however, bond, stock and currency markets in Latin America and New York all rose following Armijo's statement. While Ecuador's own currency fell, the Brazilian currency, the real, recovered to 1.88 per dollar, compared with a low of 1.99 on Friday, and the Mexican and Argentinian stock markets each rose by more than 2 percent Monday.

Ecuador's total public debt is about $13 billion, or more than 100 percent of the annual gross domestic product of the small Andean nation of 12 million people. Interest payments due in 1999 are estimated at $280 million, or 42 percent of the government budget.