Published: Friday, 12 Jun 2009 | 5:48 AM ET

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Ecuador bought back 91 percent of its defaulted bonds via an international auction and renewed threats to take action against other "illegal" debt, the country's leftist government said on Thursday.

President Rafael Correa called the debt buyback a "resounding victory" and the start of a new era in international markets that he says are at fault for the global financial crisis hurting poor nations.

Ecuador shocked investors by refusing to pay $3.2 billion in 2012 and 2030 global bonds last year, saying the debt was riddled with irregularities when issued in 2000 after the renegotiation of a previous default.

Correa's bold move could set a rare precedent as Ecuador becomes one of the first countries in modern history to get away with defaulting on its debt even though it had the resources to repay it.

"We will probably be criticized for the resounding success we had in resolving the global bonds' problem. We are now a dangerous example to other indebted countries," Correa told a cheering crowd of supporters holding banners reading "Debts should be payed but not fraud."

"We are analyzing what actions we should take with other segments of the debt, such as bilateral and multilateral debt."

Still, Finance Minister Elsa Viteri said the OPEC member wants to keep good ties with the bond markets and that bondholders that did not participate in the auction will get another chance to sell their paper in the "near future." "The republic maintains its willingness to keep positive and balanced relations with the international financial community," Viteri said.

She said 7.2 percent of the 2030 bonds and 18.7 percent of its 2012 bonds remained in the market after the buyback or about $289 million in total.

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Ecuador launched a Dutch auction for the bonds on April 20, setting a minimum price of 30 cents on the dollar.

On May 26 it announced it had accepted a price of 35 cents on the dollar, and on May 29 extended the buyback to June 3 to allow further bondholders to take up the offer.

Ecuador's bonds default stems from a government audit of its foreign debt that deemed most of the country's obligations "illegal" and recommended nonpayment.

More Defaults Unlikely

In a more moderate tone, Viteri said later that the country could sit down with other countries and multilateral lenders to discuss how to deal with "illegal" debt. She said there are many options and that her government is studying its next move.

It's unlikely Ecuador will default on more debt as it seeks loans from multilateral and allies to weather the financial crisis, analysts say.

Ecuador holds $4.3 billion in multilateral debt mostly owed to the Inter-American Development Bank and the Andean Development Corp that have good ties with the country. The Andean country owes $1.4 billion to countries ranging from Brazil to Italy.

Correa argues that servicing the global bonds deprives Ecuador of resources for development, without bringing any benefit to the country. It also says the bonds were issued by corrupt former officials acting in collusion with creditors.

Despite Correa's apparent win in the debt default, Ecuador will likely have to deal with aggressive holdouts and a stigma that will keep the Andean country out of the international debt markets for years to come.

Correa could also face attacks from some investors who were left out of the auction or refused to participate. These holdouts could seek repayment via lawsuits to seize Ecuador's assets abroad, including oil shipments.

The government will allow additional bondholders to sell debt back in an operation that will be similar to the recent auction, Economic Policy Minister Diego Borja told Reuters on Thursday.

He said most of the bondholders that did not participate in the buyback were from Italy.

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