Ecuador defaulted Tuesday on its "Brady bond" debt, the first country to do so since the program was launched in the early 1990s.

Brady bonds were first issued during a Mexican financial crisis. Under the program, named for Nicholas Brady, secretary of the Treasury in the Bush administration, the foreign-government-issued bonds are collateralized with zero-coupon U.S. government securities. The aim of the bonds was to enable countries in financial difficulty to raise money in world capital markets. Ecuador, along with most other Latin American countries, issued the bonds in exchange for bank loans on which it had defaulted.

Ecuador missed a $96 million payment on the bonds Tuesday. The government has been negotiating for a $400 million loan from the International Monetary Fund to enable it to meet its commitments. But the IMF insisted that Ecuador first agree to raise taxes and adopt severe budget restrictions. The IMF demands met stiff opposition in the country's congress, and the loan was denied.

The conditions laid down by the IMF were meant to cut Ecuador's inflation rate in half, with a return to economic growth next year.

Though the principal of Brady bonds is collateralized by 30-year, zero-coupon U.S. Treasury securities, the interest payments are not. According to terms of the original agreement, Ecuador has a 30-day grace period in which to make good on its interest payment. However, observers said it now appears increasingly unlikely that the country will be able to make the payment. It may soon have to move to restructure payments on its $6 billion worth of Brady bonds outstanding, they said.

But much can happen within the grace period, with some give-and-take by both Ecuador and the IMF. "I think that the possibility of deputies agreeing to new taxes is 50 percent," said Enrique Penaherrera, an economist at Banco de Pacifico SA.

Even if Ecuador reaches a deal with the IMF, it "doesn't mean Ecuador is going to implement reforms," said Mike Conelius, who manages $200 million of emerging market debt, including "a small amount of Ecuador debt," at T. Rowe Price in Baltimore. "They never have in the past."

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