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Ecuador Audit Calls for Default on Debt

By Jeanneth Valdivieso
Associated Press
Friday, November 21, 2008

QUITO, Ecuador, Nov. 20 -- A presidential commission recommended Thursday that Ecuador default on almost 40 percent of its foreign debt after finding "illegalities and illegitimacies" in the contracts.

President Rafael Correa said he would seek to halt payment on those debts and hold foreign investment banks and ex-government officials responsible, but fell short of declaring a default.

An audit made public Thursday advises Correa's government to default on $3.9 billion in three types of bonds issued as part of a debt restructuring in 2000. It says the negotiations lacked transparency and caused "incalculable" damage to Ecuador's economy.

The report also accuses former Ecuadorean officials and investment banks including U.S.-based J.P. Morgan and Salomon Smith Barney, now part of Citigroup, of profiting from the restructuring.

Correa said former government officials had committed "treason," and that bankers "compulsively induced, threatened, bribed and pressured with all their might to push their loans and make their juicy commissions."

He says the ex-officials and banks involved -- not Ecuador's government -- should be the ones to reimburse bondholders.

"We don't comment on ongoing investigations, but I can assure you that Citi has profound respect for the legal and regulatory environments in the countries where we operate," said Claudia Lima, Latin America spokeswoman for Citigroup, Inc.

A spokeswoman for J.P. Morgan declined to comment.

Correa won by a landslide in 2006 after vowing to default on Ecuador's foreign debt and use the money to fund anti-poverty programs instead.

He has not acted on the threat, but recently warned that falling oil prices may force his hand. Oil is Ecuador's top source of foreign income, and prices have dipped 66 percent since July.

Ecuador delayed $30.6 million in interest payments last week, saying it would use a 30-day grace period to assess the results of the year-long, 30,000-page audit.

The suspension sent Ecuadorean bonds plummeting, prompted Standard & Poor's to slash its long-term rating on the country's debt. Investment in the nation's oil and mining sectors could freeze up as well.

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