A bet on Ecuador’s volatile government bonds would probably count among the riskiest investments in emerging markets going into 2007 but potential gains are sizeable.

The bonds have seen wild swings with investors fretting over threats by Rafael Correa, Ecuador’s president-elect, to default on, or restructure, the country’s foreign debt. Unlike past defaults, a failure by oil-rich Ecuador would be due to a lack of willingness rather than ability to pay.

Mr Correa takes office this month with $135m in interest payments on bonds that mature in 2030 due in February. His rhetoric about debt policy has triggered sharp sell-offs. The yield on bonds due in 2015 has risen from 7.88 per cent since mid-November, before Mr Correa’s victory, to 13.48 per cent at the end of 2006. Investors rank Ecuador as a greater market risk even than Iraq.

However, in the event that Ecuador does not reschedule its debt, investors could make a return of 35-45 per cent within about six months, according to Richard Segal, chief  strategist at Argonaftis Capital Management.

That is a big “if”. Luis Oganes, co-head of Latin American research at JPMorgan, said: “It is very difficult to call but we are not recommending to investors that they sell aggressively . . . [the new officials] are looking at absolutely every single option and not ruling anything out. This means that anything that [they] say about debt restructuring should be taken with a huge grain of salt . . . the question is whether they will pursue a voluntary exchange which is based on market mechanisms or declare a moratorium on the debt.”