By MICHAEL M. WEINSTEIN

          Has the looming possibility that Ecuador will default on its foreign
          debts provoked an excessive amount of hand wringing? At first
          glance, it surely appears so. Ecuador produces less output in a year --
          about $15 billion -- than the United States produces in a day. The
          financial travails of such a pint-sized economy would not ordinarily
          threaten anyone beyond its own borders.

          Yet the Treasury Department and International Monetary Fund remain
          fixated on Ecuador's problems for reasons that go beyond the ordinary
          duty to help out a distressed country. This week Ecuador became the
          first country to skip interest payments on Brady bonds -- bonds issued
          by Mexico, Ecuador and other Latin countries during the debt crisis of
          the late 1980s and 1990s.

          Ecuador has a month to make interest payments before its Brady bonds
          are technically in default. But if it does default, some analysts worry that
          the Brady bonds issued by other debtor countries will also be tarnished,
          scaring investors away.

          So, will Ecuador's potential default contaminate financial markets in Latin
          America and beyond? The debate is lively.

          "Probably not," said Albert Fishlow of Violy, Byorum & Partners, a New
          York investment firm. "Ecuador's debt problem is understood to be far
          worse than that of other countries in the region."

          But Gary Hufbauer of the Institute for International Economics warned
          that if the IMF did not handle the situation carefully, Ecuador's problem
          could soon become Brazil's, Argentina's and even sub-Saharan Africa's.

          By the late 1980s, Mexico, Ecuador and several other Latin American
          countries had borrowed from foreign banks far beyond their capacity to
          repay. The solution, spearheaded by Nicholas Brady, who was treasury
          secretary in the Bush administration, was to replace the bank loans with
          Brady bonds.

          The Brady bonds helped debtors and creditors. Ecuador came out ahead
          because the banks agreed to knock down the value of its debt payments
          by about 40 percent. The banks came out ahead because the debtor
          countries put up collateral to guarantee repayment of the principal and
          some interest payments.

          By eliminating some of the debt overload and creating a security that
          could be easily traded, Brady bonds made it possible for Mexico,
          Ecuador and others to re-enter foreign capital markets, a necessary step
          to raising their depressed economies.

          But floods and a plunge in the price of oil, a key export, rocked
          Ecuador's finances last year. Political paralysis has prevented Ecuador
          from closing a huge deficit by raising taxes or by ending expensive
          subsidies for gasoline and other consumer products.

          Fishlow said that Ecuador's debt was perhaps three times greater,
          comparative to the size of its economy, than that of its neighbors. Its
          foreign debt exceeds $13 billion, of which about $6 billion is in Brady
          bonds. According to Lehman Brothers, the country spends over 30
          percent of its budget on interest payments. Few experts believe that
          Ecuador can repay all of its debt.

          The IMF is negotiating a bailout package that would provide about $400
          million in direct aid and release another $800 million from other
          international institutions. The fund will require Ecuador to reduce its
          deficit. The fund will also insist that Ecuador negotiate debt relief from its
          private creditors -- a new direction for the IMF, designed to insulate it
          from criticism that the money it would pump into Ecuador would flow
          right back out to pay off private creditors.

          But David Roberts, international economist for Bank of America
          Securities, warned that current holders of Brady bonds were the wrong
          target for the fund's new policy toward private creditors. "The banks that
          originally took Brady bonds in exchange for existing loans already wrote
          down the value of their loans," he said. "If the fund becomes cavalier
          toward current holders of Brady bonds, it threatens to drive the right type
          of foreign lenders out of Latin America." If the IMF encourages Ecuador
          to force a legal default, he warned, "it will create a legal mess."

          Hufbauer agreed: "Brady bonds helped countries pull themselves out of
          depression. The Bradys were thought of as superior debt, protected by
          collateral and a firm resolve to repay in full. For the fund to appear to be
          forcing Ecuador to default on these loans could make it impossible to use
          this device again."

          Hufbauer conceded that Ecuador could not pay all of its debts and must
          negotiate relief. What worried him was the possible role of the fund in
          insisting on default on the Brady bonds.

          Michael Hood of J.P. Morgan disagreed, warning, "Do not sanctify
          Brady debt." It trades like other debt, he said, and its holders need to
          provide some debt relief.

          In the end, the debate is not so much about Ecuador as about the fund's
          role in forcing further losses on the holders of Brady bonds. Why, some
          economists ask, should those who helped save Latin America be treated
          as villains? Because, says the other side, they are among the only
          sacrificial lambs available.
 

                     Copyright 1999 The New York Times Company