Sunday August 22, 10:23 pm Eastern Time

ANALYSIS-Cure Ecuador's debt before region gets flu

By Gustavo Oviedo

QUITO, Ecuador, Aug 22 (Reuters) - Ecuador must quickly find ways to solve its foreign debt crisis before it sows the seeds of financial chaos in Latin America, financial analysts said on Sunday.

Ecuador sent shock waves through the region on Thursday after news its government had presented the International Monetary Fund a plan to restructure its foreign debt, which could involve deferral of payments on its Brady bonds.

Analysts said a failure by Ecuador to buy back or refinance its Brady bonds, and instead postpone interest payments, would raise the chance of defaults or deferrals in other indebted Latin American nations.

Late Thursday President Jamil Mahuad said his government would not take any ``unilateral decisions'' over a possible deferral of interest payments due Aug. 31 on more than $94 million in Brady bond coupons.

Even so, the hint of a deferral was enough to spark a sell-off of Ecuadorean bonds amid speculation the world's first Brady bond restructuring was in the offing. Both Mexico's currency and Brazil's real tumbled on Friday partly as a result of the news.

Former Finance Minister Cesar Robalino said that Quito must quickly form a plan to exchange Brady bonds which will soon expire for ones with longer terms, even if it means offering investors higher interest rates.

``Another issue is buying back bonds. Ecuador's been talking about this for a long time but so far the government hasn't come up with anything. What we have to do is reach an agreement with the U.S. Treasury and with certain market players to buy back debt,'' Robalino said.

Ecuador's Brady debt represents around $6 billion of a total $13 billion in public debt and in 1999 interest payments on it will cost the nation $279 million.

Ecuador, which in 1999 will spend 42 percent of its budget on servicing debt, is facing its worst financial crisis in decades. The nation's economy is expected to contract 7.0 percent in 1999. Inflation should stand at between 55 percent and 60 percent - the highest rate in Latin America.

The nation has faced serious financial problems since last year's disastrous El Nino weather problem coincided with a fall in the price of oil -- the source of over a third of central government revenue -- and shockwaves from the Asian and Russian financial crises.

``The external debt is an enormous sum that in 1999 represents more than 100 percent of gross national product, that is, more more than 100 percent of the country's annual income,'' said Pablo Lucio Paredes, director of business consultantcy Ekos.

``We have to pay the debt because if we don't we'll disappear off the map, but on the other hand we can't pay it. ... Obviously, we have to come up with a new plan to reduce the debt.''

Official data indicates the cost of servicing Brady debt, which starting in 2000 will include repaying the actual loans and not just interest, will rise to $289 million next year. It will rise to $326 million in 2001 and $721 million in 2002.

In Quito, government finance officials have already dropped the idea of buying back debt or refinancing it if Quito ends up deferring the payment on the $94 million worth of Brady bonds.

The International Monetary Fund said Friday that it was close to a now twice postponed credit deal with Ecuador aimed at helping the nation pay off debt obligations with private creditors.

A default on a Brady bond payment by Ecuador would be the first in the history of Brady bonds -- securities created in 1989 that reduced the debt of emerging nations and guarantee interest payments. Russia avoided defaulting on its Brady debt during its severe debt crisis last year.

According economist Omar Maluk, director of the economics faculty at Guayaquil's ESPOL university, Ecuador's government made a bad decision to try and service the debt during a recession and shrinking income.

``For the last six months the government has said it has to restructure its debt. But it spent all its time paying for debt through taxes while it didn't reckon on a situation where taxes couldn't be increased because of the country's political and economic problems,'' Maluk said.

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-- Drken (Drken@bubble.gone), August 22, 1999