More hints as to how Ecuador's likely president-elect Rafael Correa might manage his country's foreign debt. In an email, Goldman Sachs Emerging Markets Economic Research argues that Correa doesn't need to default on the eurobonds:

During the campaign Mr. Correa talked extensively of a preemptive debt restructuring and a potential suspension of debt payments. However, despite all the fiery rhetoric, in our assessment Mr. Correa does not need to default on the country’s external debt obligations to fulfill his campaign promises. The country is solvent and highly liquid. Public debt as a share of GDP has been declining steadily in recent years: from as high as 101% of GDP in 1999 (of which 83% of GDP was in external debt) to an estimated 35% of GDP in 2006, which is significantly below the average for the region. Furthermore, we estimate that external debt service payments in 2007 amount to as little as 3.5% of estimated GDP (about US$820 million in principal payments and US$715 million in interest payments! ).

Not only are the 2007 external debt service obligations relatively low, but the government’s cash flow position is extremely comfortable owing to several factors: (1) buoyant non-oil tax collections; (2) high international crude prices; (3) extra budgetary revenues arising from the recent change to the Hydrocarbons Law that forced private oil companies to hand over to the state 50% of the revenues above a contractually set oil price; and (4) extra funds from the takeover of Occidental’s assets. Items (3) and (4) could easily generate close to US$2 billion in extra monies in 2007 (or about 4.5% of GDP). Hence, we think Mr. Correa could honor his campaign commitment to a significant expansion in socially targeted spending while remaining current on the country’s external debt service obligations.

However, even if, when faced with the pragmatic reality of governing, Mr. Correa does not default in 2007 because debt service payments are moderate and do not justify the significant associated visible (rating downgrades) and intangible costs (reputation), his handling of the economy and potential political confrontations could lead to a slow erosion of Ecuadorian credit’s fiscal and real fundamentals, and make a scenario of default in 2008-2009 increasingly appealing, if not necessary.

The New York Times profiles Correa this morning, and plays up his moderate streak:

It remains to be seen whether the agility of his campaign was merely a function of tactics, or a reflection of a new kind of leftist leader in the region. Even if the markets were not willing to give Mr. Correa the benefit of the doubt, others were. “If his campaign was any indication, we’ll see a Correa who is more flexible and pragmatic than dogmatic,” said Hugo Barber, director of Datanálisis, a political analysis firm.

Mr. Barber said he expected Mr. Correa to emerge as a moderate leftist more along the lines of President Néstor Kirchner of Argentina than as a leader embracing the militaristic socialist rhetoric of Mr. Chávez.

Given that Ecuador's political establishment is no friend of Correa, he may well decide not to take any irreversible financial decisions unless and until he needs to.

Ecuador Under Rafael Correa and the Threat of Debt Restructuring