UPDATE 1-S&P, Moody's cut Ecuador's credit ratigns

(Adds Moody's downgrade of Ecuador's credit ratings)

By Walter Brandimarte

NEW YORK, Nov 14 (Reuters) - Standard & Poor's and Moody's on Friday downgraded Ecuador's credit ratings, saying the country's decision not to pay the coupon on its global 2012 bonds next week signals its unwillingness to keep servicing debt.

Both rating agencies said they continue to review the ratings for possible further downgrades.

Ecuadorean Finance Minister Elsa Viteri on Friday said the government will use a 30-day grace period to decide whether to pay the global 2012's coupon, which is due on Nov. 15 and payable on Nov. 17.

The government decision will take into account the results of a broad debt audit that had shown "irregularities" in several bond transactions, the minister said.

S&P said that, with about $2 billion of cash on hand, oil-exporter Ecuador has the means to keep paying its debt, despite the expected negative effects of the global credit crisis on its economy.

"The combination of sharply lower oil prices and an expected hit to economic growth resulting from lower exports and remittances is expected to pressure fiscal accounts in 2009," S&P analyst Lisa Schineller said in a statement.

"However, willingness, not capacity, to pay is currently the overwhelming credit weakness," she added.

Moody's Investors Service had a similar analysis. The agency argued that President Rafael Correa is not facing a trade-off between implementing his social agenda and meeting external-debt obligations, "given the extraordinary good performance of Ecuador's fiscal accounts so far this year."

"It seems that the government's stance toward bond holders is motivated by political and ideological factors, given the very small fiscal relief that a default would bring compared to the damage to the government's ability to access international markets," Moody's senior analyst Alessandra Alecci wrote in a statement.

Moody's downgraded Ecuador's ratings to "Caa1" from "B3," while S&P cut them to "CCC-" from "B-," a three-notch downgrade that put the ratings at near-default levels.

S&P estimates Ecuador's global bonds due in 2012 and 2030 have a "negligible" recovery rate of 0 percent to 10 percent, meaning bond holders should expect to recover less than 10 cents to the dollar for each bond they hold in the event of default.

The global 2015 bonds, on the other hand, have an expected recovery rate of 10 percent to 30 percent, according to the agency.

The distinction reflects S&P's understanding that the government considers the global 2012 and 2030 bonds to be "illegitimate," which would cause them to be treated differently after a possible default. (Editing by Leslie Adler)