UPDATE 5-Ecuador defaults, says to fight "monster" creditors

(Adds minister on other debt payments, paragraphs 9-10)

By Maria Eugenia Tello

GUAYAQUIL, Ecuador, Dec 12 (Reuters) - President Rafael Correa declared a default on Ecuador's foreign sovereign bonds on Friday, vowing to fight "monster" debt-holders in court in one of most aggressive moves against investors in the region for years.

Ecuador's dollar-denominated debt prices plunged on news of its second default in a decade and the first in Latin America since Argentina in 2002, although the decision was not expected to lead to similar moves around the region.

Correa, a U.S.-trained economist and ally of Venezuela's anti-U.S. President Hugo Chavez, refused to make a $31 million interest payment due on Monday on 2012 global bonds, saying the debt was contracted illegally by a previous administration.

"I gave the order not to pay the interest and to go into default," Correa said. "We know very well who we are up against -- real monsters."

"If we have to face international litigation due to this, we will," he added at a news conference in the OPEC nation's largest city of Guayaquil.

The default is unlikely to have a knock-on effect in other Latin American countries' debt policies even if some, such as Venezuela, have pledged to investigate any irregularities in their own debt, Wall St. economists said.

Correa, who had often threatened to default, will offer bond-holders a tough restructuring deal. Last month, Ricardo Patino, a top debt adviser to Correa, said investors should expect a reduction of more than 60 percent in the nominal value of the global paper in any negotiations.

Ecuador's global bonds -- the 2012s, 2015s and 2030s -- total $3.8 billion of its roughly $10 billion debt.

Ecuador will for now keep servicing debt of about $5.8 billion owed to multilateral organizations and other countries, Patino, the minister for politics, told Reuters .

But Patino, who was on a trip to the United States to make Ecuador's case that much of its debt is illegal, did not rule out stopping such payments.

"LIFE BEFORE DEBT"

Although the default decision comes against the backdrop of a global financial crisis, Ecuador received record income from oil exports for much of the year and has enough funds to make the payment. Correa's policy is driven by ideological rejection of such debt deals, according to economists.

Correa, whose political slogan is "life before debt," is popular among Ecuadoreans for his stance against investors.

He has already forced foreign companies to change contract terms in the oil and mining industries and ejected a major Brazilian building company in a dispute over a dam construction as he seeks to increase state income.

But the default is his harshest move in almost two years in office and is in keeping with a shift toward confrontation in the region between leftist governments and foreign investors.

The default will likely lead to drawn-out investor lawsuits against Ecuador, further close off credit lines to the oil- and banana-exporting nation and cause foreign investment into areas such as mining to dry up.

That bleak economic outlook looms just as Correa will struggle with falling income because oil prices have plunged in recent months more than $100 a barrel.

"This is perhaps the visible implementation of President Correa's long-espoused thesis that countries should default preemptively," Alberto Ramos, a senior economist at Goldman Sachs wrote in a research note from New York.

Argentina defaulted in an economic crisis and was punished for years as it lost much of its access to foreign credit.

Ecuador says it has worked to shield itself from fallout from the default. It announced it has secured a $1 billion credit line from the Andean Development Bank and that it has talked to allies, such as Iran, about possible loans.

Citing unnamed sources, an Ecuadorean newspaper reported this week the government had bought back about $680 million in bonds as the debt's prices fell due to Correa's threats. If true, Correa will have fewer bond-holders to battle in court.

On Friday, Ecuador's 2012 bond were bid 10.25 points lower at 25.313, driving the yield up to 90.643 percent. The bonds were bid down 4.25 points in price prior to the announcement.

(For related information on Ecuador's debt default click inside the brackets, see [ID:nN12545608]) (Additional reporting by Alonso Soto in Quito, and Daniel Bases and Walter Brandimarte in New York, Writing by Saul Hudson; Editing by Diane Craft)