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UPDATE 1-Ecuador, IMF reach preliminary agreement on $6.5 bln facility

(Adds details, analyst comment)

NEW YORK, Aug 28 (Reuters) - The International Monetary Fund said on Friday it had reached a staff-level agreement with Ecuador for a new $6.5 billion facility to help the South American country address the economic shock caused in part by the sharp drop in oil prices and the COVID-19 pandemic.

The agreement, subject to approval by the IMF’s executive board, clears the way for the settlement of a $17.4 billion debt exchange between Ecuador and its creditors, expected on Monday.

The goal of the 27-month Extended Fund Facility (EFF) agreement is to help the Ecuadorian authorities stabilize the economy and protect the lives and livelihoods of its citizens, the IMF said.

The arrangement will partly support Ecuador’s policies “to expand the coverage of social assistance programs” and “protect the vulnerable segments of the population,” said in a statement Ceyda Oner, the IMF mission head for Ecuador.

Ecuador’s economy is expected to contract 11% this year, she said.

The agreement “shows strong international diplomatic support for a country that has pushed an opening agenda,” said Siobhan Morden, head of Latin America fixed income strategy at Amherst Pierpont Securities in New York.

“The vote of confidence from the IMF will likely translate into normalized exit yields of 10% or perhaps even lower,” she added.

Ecuador’s deal with private creditors was expected to improve the government’s cash flow by $10 billion in the coming four years.

The IMF had approved an EFF for Ecuador in March 2019 that was canceled in May 2020. (Reporting by Rodrigo Campos; Editing by Sandra Maler)

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