September 12, 2008 / 10:30 PM / in 9 years

UPDATE 1-Ecuador sees "illegitimacy" in 2012 and 2030 bonds

(Adds auditor’s quote, details and background)

QUITO, Sept 12 (Reuters) - Ecuador has found indications of “illegitimacy” in its global bonds due 2012 and 2030, a government auditor said on Friday, raising the risk the government could stop honoring that debt.

Hugo Arias, a member of the debt audit group that is scheduled to release its final report next week, said the global bonds due in 2015 had no indications of irregularities.

President Rafael Correa, a former economy minister, has threatened to halt payments of “illegitimate” debt, or loans he says contain irregularities or conditions unfair to the state.

“We didn’t have time to move forward with the 2015 (global) bonds... but they don’t stem from the illegitimate restructure of the Brady bonds like the (bonds due on) 2012 and 2030,” Arias told Reuters.

The debt commission, launched last year by Correa, has questioned global bonds that the government says were issued as part of an unfair renegotiation of defaulted Brady debt. Correa has said the restructuring of debt was negotiated by former Ecuadorean government officials in cahoots with Wall Street bondholders.

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

Arias said the commission could recommend that the government challenge the bond deals in international courts as the first option.

He said the commission could also recommend restructuring the bonds or even a default, but the final decision will be made by Correa.

“The country will have to analyze the consequences of a default,” Arias said. “We need to know what weapons we have before going to war.”

Analysts say it is very unlikely that the cash-flushed government will stop paying its debt this year.

Franklin Canelos, the vice-president of the commission, told Reuters earlier it was unlikely the group could deliver its final report to Correa next week as it was expected. (Reporting by Alonso Soto; editing by Diane Craft)

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