Jan. 23 (Bloomberg) -- Ecuador's bonds fell to a 2 1/2-year low as concern mounted that President Rafael Correa is moving closer toward a default.

The government's benchmark 10 percent dollar bonds due in 2030 dropped 2 cents on the dollar to 67 cents, leaving them down 30 cents since Correa was elected in November, according to JPMorgan Chase & Co. Ricardo Patino, Correa's economy minister, said last week that a restructuring that leaves investors with bonds worth 40 cents on the dollar is ``possible.''

``The market is starting to believe what they are saying,'' said Eric Baurmeister, who helps manage about $4.5 billion of emerging market debt for Morgan Stanley Investment Management in New York. ``The specificity of Patino's comments has led people to believe the government is more advanced than they thought.''

Yields on the 10 percent bonds, the government's most traded securities in international markets, jumped 44 basis points, or 0.44 percentage point, to 15.17 percent at 6:12 p.m. in New York, according to JPMorgan. Ecuador issued the 10 percent bonds in 2000 as part of a restructuring of debt it defaulted on amid a recession in 1999.

Fitch Ratings cut Ecuador's foreign debt rating two levels today to CCC, four levels above default, from B-. Patino's comments last week suggest ``a payment default or distressed debt exchange is likely near-term,'' Fitch said in a statement.

Fitch follows Standard & Poor's in cutting Ecuador's rating. S&P last week lowered it one level to CCC, four levels above default, from CCC+ and lowered the rating outlook to negative from stable. Moody's Investors Service rates Ecuador debt Caa1, five levels above default. It cut the country's rating outlook this month to stable from positive.

`Reasonable' Restructuring

The average yield on Ecuadorean bonds over similar-maturity U.S. Treasuries widened 72 basis points today to 10.51 percentage points, making them the riskiest emerging-market debt tracked by JPMorgan.

Patino, 52, floated the debt reduction figure to investors in a meeting in Quito on Jan. 17, the first indication of the amount the South American country is looking to shave off its debt servicing. He reiterated those comments in Rio de Janeiro on Jan. 19, saying a restructuring that would leave investors with bonds worth 40 percent of face value ``could be reasonable.''

``The situation there will continue to deteriorate,'' said Silvia Marengo, who manages $130 million of emerging-market bonds at Clariden Bank in London. ``They will do some market exchange with some haircut of around 40 percent.''

Argentine Advisers

Patino, who took office last week with Correa, said on Jan. 19 he expects to finish a debt restructuring plan by the end of the month. Correa says he plans to restructure the debt -- much of which he calls ``illegitimate'' -- to free up more funds for health care and education.

Argentina plans to send the officials who handled the country's restructuring of $95 billion of defaulted debt to advise the Ecuadoreans, Correa said last week. Argentina paid investors about 30 cents on the dollar in 2005 following the biggest default ever.

Correa, a 43-year-old economist, said in his inaugural address on Jan. 15 that his administration deems much of the country's $11 billion of foreign debt to be illegitimate because it was contracted by military dictatorships decades ago.

Many investors have been reluctant to take Correa's default threats seriously because of the strength of the oil-producing country's economic expansion and government finances.

`Key Credit Concern'

Ecuador's economy grew an estimated 4.7 percent in 2006, buoyed by rising oil exports, after expanding 3.9 percent the previous year, according to the central bank. That growth gave Ecuador, which adopted the dollar as its currency in 2000, a budget surplus equal to 4.3 percent of gross domestic product last year, according to Barclays Capital.

``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,'' Fitch said in its statement. ``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.''

To contact the reporter on this story: Lester Pimentel in New York at Lpimentel1@bloomberg.net

Last Updated: January 23, 2007 18:16 EST