Emerging Markets-Ecuador slumps on hard-line debt auditor view

By Walker Simon

NEW YORK, Aug 18 (Reuters) - Ecuador's debt slumped on Monday in a holiday-thinned market after the country's top debt auditor said there was enough evidence to consider halting payments on foreign loans deemed "illegitimate."

The country's benchmark dollar-denominated global bond due in 2030 ECUGLB30=RR fell 5.750 to bid 85.750, offering a yield of 12.066 percent. It was the bond's steepest one-day percentage fall in just over a year.

The fall in Ecuador's bonds was exacerbated, analysts said, by slow summer holiday volume, plus heightened credit risk worries fueled by fears over more U.S. mortgage losses.

Shares of top U.S. housing financiers Fannie Mae (FNM.N) and Freddie Mac (FRE.N) shed over 20 percent after Barron's reported that the U.S. Treasury may need to bail them out.

"Ecuadorean bonds are down in an illiquid market mainly because of debt statements by Ricardo Patino," said Lehman Brothers analyst Gianfranco Bertozzi. Patino, the Ecuadorean debt auditor, had reiterated previous positions, Bertozzi said.

"Investors are increasingly on the sidelines of emerging markets in the last few weeks as turmoil in credit markets continues and summer draws to a close," he added.

Patino told Reuters late Thursday in an interview that the debt panel, over which he presides, had found sufficient evidence of debt that was "illegitimate."

Ecuador deems debt "illegitimate" when it says it was acquired under unfair terms by past governments that can be tarnished by such factors as irregularities or corruption.

The debt audit panel is expected to issue its findings in mid-September. It is due to make recommendations to President Rafael Correa on how much of of Ecuador's $10.1 billion foreign debt should be honored.

It is up to Correa to make a decision on debt payments.

"It's likely that investor disappointment with Patino's hard-line stance was a factor in sending Ecuador bonds down," said David Spegel, ING's global head of emerging markets strategy in New York.

"But you also have investors shying away from riskier, high beta credits," he added referring to credits with higher volatility and comparatively low credit ratings like Ecuador.

As a whole, Ecuador's global bonds fell 3.45 percent, according to returns tallied by JP Morgan's Emerging Markets Bond Index Plus (EMBI+) 11EMJ. Returns are mainly based on bond prices and also factor in coupon payments.

Yield spreads on Ecuador's portion of EMBI+ over U.S. Treasuries widened by 10 basis points to 697 points, reflecting increased investor risk perception.

Globally, emerging market bonds' yield spreads over U.S. Treasuries widened by 2 basis points to 302 basis points and returns edged 0.06 percent lower.