The chances of Ecuador becoming the second country to default on its debt since the financial crisis began have risen sharply.

It follows the country's move on Friday to delay meeting a $30.6m bond repayment, as Rafael Correa, its president, warned the debt might be "illegitimate".

According to news-paper reports in Ecuador yesterday, the official overseeing the audit of Ecuador's foreign debt said his committee would recommend that the country default on its entire $10.3bn in foreign debt.

The biggest loser, should the leftwing administration refuse to make repayments on its bonds, could turn out to be its main ally Venezuela, which holds much of the country's debt, as well as Ecuador itself.

The country's credit default swaps, a form of insurance against bonds defaulting, have jumped since Friday to about 2,300 basis points from about 1,700bp, meaning an increase of $6,000 to insure $10m of debt over five years.

Mr Correa has raised concerns over the legitimacy of the debt, because he says it has harmed the country's economy and its people. Mr Correa has suggested that previous governments mishandled debt negotiations and abused privileged information for financial gain.

Mr Correa, who delayed a payment in similar circumstances in February last year, only to pay up at the last minute, is taking a big gamble. The other country to have defaulted on its debt this year is the Seychelles.

Nick Chamie, head of emerging markets research at RBC Capital Markets, says: "It is a small economy, which has often hinted at not paying its debt in the past, so the likelihood for contagion in Latin America is low. Only Venezuela is likely to suffer because it holds a large chunk of Ecuador's debt." Until Friday, many analysts had judged the country was unlikely to default before general elections next April.

A 60 per cent drop in the oil price, from a high close of around $150 a barrel in the summer, to about $57 a barrel, is harming the oil-producing nation. It needs an oil price of $95 a barrel to cover all the spending in its budget and a price of $76 to avoid depleting its $6.3bn of foreign reserves, according to Barclays Capital.

Patrick Esteruelis, Latin America analyst at Eurasia Group, said the president seemed to be motivated to act now by "strong dogmatic considerations", the drop in oil prices and the chance to renegotiate debt terms in depressed market conditions.

Alberto Bernal, head of emerging markets macro-economic strategy at Bulltick Capital Partners, said: "It remains to be seen what Correa's next move is going to be.

"But I'm sure this is not going to be as easy as he thinks . . People are taking much less risk."

Labels: Ecuador