Jan. 19 (Bloomberg) -- Ecuador's credit rating was cut by Standard & Poor's two days after the country's economy minister told investors the government was considering repaying only 40 percent of its foreign debt.

S&P cut the rating one level to CCC, leaving it four levels above default, from CCC+ and lowered the rating outlook to negative from stable. Economy Minister Ricardo Patino, speaking today in Rio de Janeiro, said he expects to finish a debt restructuring plan by the end of the month.

``An unfriendly restructuring looks very real,'' said Christian Stracke, head of emerging-market research at New York- based CreditSights Inc. ``It sounds like they are going to offer very poor terms.''

Ecuador's bonds fell to a two-year low as the South American country moved closer to its second default since 1999.

The government's 10 percent dollar bonds due in 2030, the country's most traded securities in international markets, dropped as much as 4 cents on the dollar to 68 cents before rebounding to 72, unchanged from yesterday. The bond yielded 14.12 percent at 4:20 p.m. in New York, leaving it up 1.1 percentage points this week, according to JPMorgan Chase & Co.

Patino, 52, reiterated today comments he made to investors in Quito on Jan. 17, saying a restructuring that would leave investors with bonds worth 40 percent of face value ``could be reasonable.''

``Considering much of this debt is illegitimate, a cut of that magnitude is possible,'' Patino, who took office this week with President Rafael Correa, said after leaving Mercosur trade bloc meetings in Rio de Janeiro.

Argentine Officials

Correa, a 43-year-old economist who counts Venezuelan President Hugo Chavez among his closest allies, 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 years ago. He has said since the campaign that he would restructure the debt to free up more money for health care and education.

``Our debt is too large for the size of our country and our realities,'' Correa said today in Rio de Janeiro.

Argentina's officials who handled their country's debt restructuring in 2005 will meet with Ecuadorean officials in coming days, Correa said. Argentina gave investors new bonds worth about 30 cents on the dollar in 2005 after defaulting on $95 billion of debt amid recession in 2001.

`Dogmatic'

Ecuador's economy is expanding, buoyed by a surge in oil revenue last year. The economy grew an estimated 4.7 percent in 2006 after expanding 3.9 percent the previous year, according to the central bank. That growth, which gave the government a budget surplus in 2006, led many investors to bet in recent weeks that Correa wouldn't make good on his default threats.

``They seem to have a dogmatic and ideological view on debt and they will act on it irrespective of the significant capacity to pay,'' said Alberto Ramos, a Latin America economist with Goldman Sachs Group Inc. in New York. ``We see S&P's downgrade as warranted.''

S&P's rating cut is its first move on Ecuadorean debt since June 2005, when it lowered it one level to CCC+.

The rating cut ``reflects repeated policy signals by the new administration that indicate significant downside risk to timely debt service,'' S&P analyst Lisa Schineller wrote in a statement.

Moody's Investors Service rates Ecuador debt Caa1, five levels above default. It cut the country's rating outlook last week to stable from positive.

The price on Ecuador's benchmark 10 percent bonds has sunk 25 cents since Correa won election Nov. 26 after pledging to rewrite the constitution and boost spending on the poor,.

The average yield on Ecuadorean bonds over similar-maturity U.S. Treasuries widened 7 basis points, or 0.07 percentage point, today to 9.53 percentage points, according to JPMorgan data.

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

Last Updated: January 19, 2007 16:25 EST