UPDATE 4-Ecuador raises debt default specter, jolts investors

(Recasts; adds official comment, details throughout)

By Alonso Soto

QUITO, Nov 14 (Reuters) - Ecuador on Friday threatened to withhold payment of a coupon due on some bonds in a move that raised the specter of a default on its $10 billion debt, prompting credit ratings downgrade and sending its debt prices tumbling.

The government of leftist President Rafael Correa, who has repeatedly warned he could default on some debt, said it would not pay the $31 million coupon on 2012 bonds due on Saturday and payable on Monday, but would instead use a 30-day grace period to decide its next move.

Analysts said the announcement could be a negotiating tactic given that Correa has said he could restructure the oil-exporting country's debt pile. Correa's government has taken strident positions in initial talks with investors only to later strike deals.

But investors took no chances, immediately dumping Ecuadorean bonds even though Ecuador's finances are solid enough for it to make payments.

Standard & Poor's downgraded the country's debt, slashing it by three notches to 'CCC-' putting the rating at near-default levels because of the "severe uncertainty" over the government's willingness to pay its debt.

Finance Minister Elsa Viteri said the decision whether to pay would be based on an assessment of a government-sponsored audit of Ecuador's outstanding debt. The recommendations could be published as early as Thursday.

"Ecuador's government has decided to use the grace period of up to 30 days," Viteri told reporters. "After finding serious indications of illegitimacy, we have decided to wait for the official presentation of this report."

Viteri said the government could negotiate new debt terms with bond-holders as one of several options to be decided.

With the OPEC nation's oil revenues falling, Correa -- a socialist ally of Venezuela's firebrand President Hugo Chavez -- has said he will prioritize financing programs for the majority poor over paying debt that he says is riddled with irregularities.

Wall Street analysts said Correa aimed to get bondholders to the negotiating table and pressure them to accept a government offer to lower its debt burden in coming years.

But they warned the tactic could backfire if investors reject such a deal and it leads to non-payment even if that is not the government's intention.

Alberto Ramos, an analyst at Goldman Sachs in New York, said the government might end up suspending debt service payments as it will be unlikely to get any concessions from bondholders.

"We would not be surprised if this approach fails and the government raises the ante by electing to embark on an outright moratorium on debt service payments," he said in a research note to clients.

TOUGH TALK

Ecuador's global bond due 2012 ECUGLB12=RR lost 17.375 points in price to bid 13.938.

Despite the negative market reaction, Ecuador continued to talk tough.

Economic Policy Minister Pedro Paez told Reuters the government would "go all the way" in taking action against what he called corrupt debt. Ecuador has talked to allies about possible loans should credit lines to the nation's businesses close due to a conflict with bondholders.

In September, the government said it found indications of irregularities in global bonds due in 2012 and 2030. The debt audit commission has questioned the legitimacy of bonds it says were issued as part of a renegotiation of defaulted Brady bonds.

The global bonds due in 2012, 2015 and 2030 total around $3.8 billion, according to Finance Ministry data.

Ecuador's bond prices have plummeted in recent weeks as crude oil prices slid from highs of around $147 a barrel in July. Bondholders worry Correa may choose to halt some payments if state coffers are squeezed by the global financial crisis. (Reporting by Alonso Soto; editing by Gary Crosse)