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Ecuador IMF deal should follow dollarization

By Hugh Bronstein

NEW YORK, Feb 29 (Reuters) - Wall Street on Tuesday welcomed the prospect of Ecuador adopting the U.S. dollar as its official currency this week. Analysts said the move would presage a deal with the International Monetary Fund and then a restructuring of the country's defaulted debt.

``We are optimistic that the passing of this legislation could lead to some kind of agreement with the multi-lateral community and that could lead to addition talks with bond holders about restructuring the debt,'' said Whitney Kane, an emerging markets analyst at Morgan Stanley Dean Witter.

Ecuador on Tuesday resumed debate on a bill aimed at stabilizing its chaotic economy by using the U.S. dollar as the national currency after approving 80 of the bill's 85 articles the night before.

``The legislation is significant in that it shows that the president may be able to create a constructive working environment with the (opposition) Social Christian Party going forward,'' Kane said.

Many analysts consider the dollarization bill to be President Gustavo Noboa's best chance to rescue the country from its worst economic crisis in 50 years.

Ecuador declared a moratorium on foreign debt payments last year as total public foreign debt reached more than $13 billion, equal to its gross domestic product.

Dollarization was first proposed on Jan. 9 by President Jamil Mahuad, who was ousted in a bloodless coup. The proposal was taken up by his vice president, Noboa, after he succeeded to the presidency on Jan. 22.

IMF officials suggested modifications to the dollarization plan Friday night, monetary authorities said, without giving details. Analysts on Wall Street said indications were that Congress is incorporating the IMF's ideas, which bodes well for a future multilateral deal.

``The good news is that Congress is apparently considering the observations that were made by the IMF last Friday,'' said Luis Oganes, emerging markets strategist at J.P. Morgan.

``After the bill gets approved, an IMF agreement will be the next thing to expect. This would allow Ecuador to resume its debt restructuring talks with private creditors and the Paris Club (of country creditors),'' Oganes said.

Michael Henry, economist for Latin America at ING Barings, said neither the IMF nor private investors would make capital available to Ecuador until it was apparent that the country was ready to take unified political action to save itself.

``Ecuador is closer now to a deal with the multilaterals than they have been for a very long time because you are now seeing Congress working with the administration,'' Henry said.

``The fact that they're moving forward on their own agenda, and taking suggestions from the multilaterals, is very positive,'' he added.

Still, Henry said, ``Bond prices seem to be getting ahead of the story.''

Ecuador PDI bond prices rose 16 percent in February, Henry said. PDI paper gained 1-1/4 to bid 24-1/4 Tuesday.

Walter Molano, head of research at BCP Securities, said dollarization will not be the end of the work Ecuador has to do to fully gain the market's trust.

``In order to sustain dollarization they have to get their fiscal situation under control and that's been Ecuador's problem all along,'' Molano said.

``Dollarization is just a temporary fix,'' he said. ``It does not go to the underlying problems.''