Fitch Downgrades Ecuador's Sovereign Ratings to 'CCC'; Watch Negative.

NEW YORK -- Fitch Ratings has downgraded the long-term foreign currency Issuer Default Rating (IDR) of Ecuador to 'CCC' from 'B-', indicating that default is a real possibility in the near term.

In addition, the following ratings are downgraded:

--Uncollateralized foreign currency bonds to 'CCC/RR4' from 'B-/RR4';

--Collateralized foreign currency Par and Discount Brady bonds to 'CCC+/RR3' from 'B/RR3';

--Short-term foreign currency IDR to 'C' from 'B'.

Fitch has also affirmed the Country ceiling rating at 'B-'.

The Brady Pars and Discounts have collateral which raises likely recovery above that which is expected for the uncollateralized obligations.

Fitch has likewise placed the IDR and debt ratings on Rating Watch Negative to reflect a reasonable probability of near-term rating downgrades.

These rating actions are based on pronouncements by the Ecuadorian authorities expressing a high likelihood that they will seek a debt exchange implying a material loss to bondholders (which would be considered an event of default by Fitch) or will fail to make timely debt service payments in full.

Incoming Finance Minister Patino's reported statement to investors on January 17, 2007 that much of Ecuador's sovereign debt is illegitimate and that the government may seek a 60% NPV haircut suggests that a payment default or distressed debt exchange is likely near-term. He has also reportedly stated that the February 15, 2007 $135 million coupon payment on the 2030 Global bonds would depend on the availability of unrestricted cash on hand, which is reported to be considerably less.

Willingness to pay, already one of the key weaknesses in Ecuador's credit profile, has obviously deteriorated and is, at this stage, the key credit concern. Paradoxically, macroeconomic stability and high oil prices have improved the government's financial position in recent years, leaving it better able to pay than it has been since the 2000 default. Oil-related trust accounts have accumulated balances in excess of $1 billion. The central government ran a surplus in each of the last two years and is expected to do so again this year based on a revenue boost from higher taxes on the oil sector and the government's broader ownership following its early termination of leases to Occidental Petroleum. External bond debt service of $459 million amounts to a mere 1.1% of estimated GDP and total central government financing requirements are estimated at about 5% of GDP, lower than many other speculative grade sovereigns. Public and external debt ratios have declined markedly in recent years and are also now lower than speculative grade peers'.

Nevertheless, public sector liquidity remains constrained, with US$2.3 billion in year-end 2006 official reserves covering 2007 government public external debt service of US$1.5 billion. A more constructive relationship with creditors could open up short-term financing possibilities in order to stay current on debt service. Instead, authorities appear to have chosen to emphasize their present liquidity constraints in order to gain leverage vis-a-vis bondholders.

Fitch will continue to monitor the government's communications with respect to its intentions to service or restructure its debt. In the event the government misses the February 15, 2007 coupon payment and/or announces a distressed debt exchange (DDE), the IDR would be downgraded again to indicate probable and imminent losses in NPV terms to bondholders. At the time of a payment default or the consummation of a DDE, the long-term foreign currency IDR would fall to 'RD', indicating the sovereign is in default. Individual securities' ratings will reflect both default risk and recovery prospects, and would not fall below 'C'. Assuming an average recovery rate of between 31% and 50%, ratings on defaulted securities would fall to either 'CC' or 'CCC-' upon a payment default or the consummation of a distressed debt exchange. In the event of a DDE, the new debt instruments created would be assigned a non-default rating based on Fitch's assessment of the terms of the new debt as well as the capacity, and importantly, the willingness to meet these obligations going forward.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.