Emerging debt-Ecuador up on bargain-hunting, market strong

NEW YORK, July 9 (Reuters) - Ecuador's yield spreads, a gauge of default risk, tightened on Wednesday as investors bought up the paper after it lost more than 3 percent on the resignation of the country's finance minister on Tuesday.

Yield spreads between Ecuador's bonds and comparable U.S. Treasury notes, an important gauge of investor aversion to risk, narrowed 10 basis points to 656 on JP Morgan's Emerging Markets Bond Index Plus (EMBI+) 11EMJ.JPMEMBIPLUS.

Returns were up 0.73 percent, a slight recoup from the 52 basis points of widening experienced on Tuesday.

New Ecuadorean Finance Minister Wilma Salgado, a former head of the country's Deposit Guarantee Agency (AGD), said on Tuesday her government has enough resources to honor foreign debt payments this year.

Earlier she said the government would act against "illegitimate" sovereign external debt after it has been audited.

"The administration in Ecuador is aware of what happens in the market and how they are perceived by the market and so they took a precautionary step by having Salgado come out late in the day and say they will service debt this year," said Enrique Alvarez, head of Latin America debt strategy for IDEAglobal.

"This calmed the anxiety to a certain degree and sort of offset the damage she did in the prior statements yesterday. This is the bounce that you are seeing today."

On Tuesday alone Ecuador's bonds managed to lose 3.5 percent, leaving investors with a 2.2 percent return so far this year, according to the EMBI+. The country's returns are still performing not as badly.

On Wednesday Salgado said she would prefer agreements with creditors in any debt restructuring which would be aimed at slashing interest rates and fixing past "irregularities" in debt dealings.

"Ideally the new finance minister wants to avoid market turmoil in the future, when and if we get to a debt renegotiation. This sounds pragmatic, almost market-friendly. Yesterday's drop seems even more overblown on the back of this tone," said Gianfranco Bertozzi, emerging market debt analyst at Lehman Brothers, in a note.

SPREADS TIGHTER

Overall spreads tightened 4 basis points on the EMBI+ on an improved appetite for risk among investors after Federal Reserve Chairman Ben Bernanke said on Tuesday the U.S. central bank may keep an emergency lending facility for big Wall Street firms open longer than it initially intended.

The rhetorical backing from Bernanke and Treasury Secretary Henry Paulson calmed financial markets and drove U.S. stocks higher.

"The equity market which was plunging last week is stabilizing this week in the U.S., and that has taken another factor off the table for Latin America from being on the defensive," Alvarez said.

Meanwhile, major Latin American countries continue to experience rising inflation and thus added pressure to raise borrowing costs due to high food and energy costs.

Mexico's inflation rate in June jumped at its fastest pace since late 2004 at 5.26 percent. This reinforced investors' expectations the central bank will raise interest rates as soon as next week. For details see [nN09378703].

"There is a very big inflation/interest-rate watch going on in all the key countries in Latin America, be it Mexico, Colombia, Brazil, and though that is not filtering into debt pricing, that is very relevant on the domestic front," Alvarez said. (Editing by James Dalgleish)