How Ecuador sold itself to China

By Felix Salmon
July 5, 2011

When a country is a serial defaulter, two things happen: it regularly writes down the value of its own debts, and it can’t borrow money anywhere else. The result looks something like this:


The implication of this chart is that Ecuador is finally, perforce, living within its means — something you have to do, if you have no ability to borrow.

Except there’s something the chart doesn’t show: China.

Ecuador’s government on Monday signed a loan for $2 billion with the China Development Bank Corp., Ecuador’s Finance Ministry said, as China deepens its financial ties with the South American nation…

Currently, China’s loans to Ecuador exceed $6 billion, including $1.7 billion to finance 85% of Coca-Codo Sinclair, a hydropower plant to be built by China’s Sinohydro Corp. in Ecuador, which will supply about 75% of the country’s energy needs.

In a country the size of Ecuador, these numbers are huge. The latest newsletter from Ecuador’s Analytica Investments puts them in perspective:

Since the 2008-9 default, which chopped the government’s foreign debt to $7.01 billion, debt has surged 54% to $10.78 billion with the latest deal…

Newspaper El Universo reported that the loan from China’s Development Bank is tied to another 72,000 barrels per day of oil deliveries, citing a memo from the negotiations. That would make Ecuador owe 75% of its oil exports to China, the paper cited opposition legislator Vicente Taiano as saying…

Ecuadorian bankers report that Ecuador wants a $10 billion credit line from China. If that were to happen, Ecuador would owe the Asian giant an extraordinary 24% of GDP.

With the latest deal, Ecuador owes China some $8 billion, or 19% of GDP. That’s more than its total external debt, as measured in the kind of charts which people generally look at when they want to know debt-to-GDP ratios.

This is something which happens when sovereigns default: they risk losing their sovereignty. Ecuador now resembles a wholly-owned subsidiary of China, much like many solvency-challenged yet resource-rich countries in sub-Saharan Africa. And a glance at Greece is enough to see how that country has essentially ceded much sovereignty to the EU.

Not all defaulting countries run into this issue: Argentina still does whatever it wants to do, and is beholden to nobody. But the oldest and loudest complaint about the IMF is that it forces governments to do its bidding in return for providing emergency financial assistance. And compared to the likes of China, the IMF is positively mild in terms of self-serving policy prescriptions. It’s a key reason why governments are well advised to address fiscal problems sooner rather than later. Because if they dally too long, they risk losing their very independence.


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it seems to me that this sort of thing puts China into a similar mutually beholden relationship as it has with the US (or even North Korea, puns ho!). If China puts too much pressure on Correa, then the government will collapse, the opposition takes over and repudiates the debt. So China, if it is unwilling to simply write off all this debt has to continue to play along and reschedule debt, offer new loans etc.

What could China do to otherwise enforce its lending? Invade? Blow up the damn?

One of the major geopolitical factors for the coming decade is how China is going to deal with all of the debtor nations it is now creating.

Posted by timothyogden | Report as abusive

And compared to the likes of China, the IMF is positively mild in terms of self-serving policy prescriptions.

Felix: could you please give me some examples of what it is China makes countries that owe them money do?

Posted by Foppe | Report as abusive

Foppe, we already know you know sweet FA about the IMF and its impact but to say China doesn’t have a wholely malign influence on the countries is just bizarre.. For instance, the conditions attached to the aid in Africa is that the staff is wholely chinese. Also as long as North Korea leases out ports and supplies minerals and prostitutes below cost, China is happy to let Kim Jeong Il starve to death around 10% of his population. Care to mention where the IMF has done that? Dumb arse.

Posted by Danny_Black | Report as abusive

A curiously hostile response to a request for clarification. But I guess it’s not allowed to ask for links any more.
But, very well. Let’s quote a bit:

“When the Asia Pacific Economic Cooperation Summit was held in November 1997 in Vancouver, four months into the crash, Bill Clinton enraged his Asian counterparts by dismissing what they viewed as an economic apocalypse as “a few little glitches in the road.”12 The message was clear: the U.S. Treasury was in no rush to stop the pain. As for the IMF, the world body created to prevent crashes like this one, it took the do-nothing approach that had become its trademark since Russia. It did, eventually, respond—but not with the sort of fast, emergency stabilization loan that a purely financial crisis demanded. Instead, it came up with a long list of demands, pumped up by the Chicago School certainty that Asia’s catastrophe was an opportunity in disguise.
According to the new agreements, Thailand would allow
foreigners to own large stakes in its banks, Indonesia would cut food subsidies, and Korea would lift its law protecting workers against mass layoffs. The IMF even set strict layoff targets in Korea: in order to get the loan, the country’s banking sector needed to shed 50 percent of its workforce (later lowered to 30 percent). This kind of demand was crucial for many Western multinationals who wanted assurances that they could radically downsize the Asian firms they were about to buy.”"

I would humbly submit, once again, that the entire Asian crisis was made possible by the IMF+US’s constant pushing to deregulate capital flows. Had this not been done prior to the crisis, it literally could not have happened. Sure, not quite the same as helping Kim Jong Il, but this crisis alone probably impacted more people than Il ever will be able to.

Lastly: could you please grow up? There is so much childish name-calling and cussing in your post I am led to believe you are a 12-year-old. Surely this is not your intention..

Posted by Foppe | Report as abusive

My mind was going the same places as timothyogden. Suppose Ecuador defaults on this; presumably bilateral trade relations suffer immediate consequences. Does China push other countries to suspend trade and assistance, too? Suppose it goes so far as a naval blockade; at what point do other countries start to push back against China? If China actually invades Ecuador, do other countries say, Hey, we can’t let something like this go, or do they just say, Oh, I guess I want to stay on China’s good side?

Posted by dWj | Report as abusive

Sorry, I think I’m missing something. This is a chart of Ecuadors’ external debt. China is a party that could issue debt and is definitely external to Ecuador. Looks like the total debt has been hovering around 15% of GDP for the past two years. Yet:

“With the latest deal, Ecuador owes China some $8 billion, or 19% of GDP. That’s more than its total external debt, as measured in the kind of charts which people generally look at when they want to know debt-to-GDP ratios.”

Huh? Is it 15% of GDP, or 34%? Is Chinese debt a part of this chart? Or is this a chart of all external debt EXCEPT china’s? Or, is it something else I’m just not thinking of…

Posted by TravisWiebe | Report as abusive

Travis is right; at a minimum this needs a clearer definition of terms.

Posted by kenjd | Report as abusive

If US, the world’s most powerful nation can sold itself to China, why not Ecuador? Before America can set an example how to wipe out its huge budget deficit for the small poor country, shut up your mouth, Mr. Felix salmon.

Posted by blinded1 | Report as abusive

Foppe, I responded the first time you spouted this BS about the IMF and the Asian Crisis, where you made a claim about Malaysia coming out well when it ignored the IMF’s suggestions vs what happened to the countries that took the IMF’s advice. I suggested you look at what actually happened to Malaysia’s economy in real terms as opposed to quoting Naomi Klein who may actually be one of the few people on the planet to have less of a clue than you.

PS I thought i was very polite to a guy who apparently can’t tell the difference between Thailand – who did go to the IMF – and Taiwan – who contrary to your claim, did not.

Posted by Danny_Black | Report as abusive

dWj, presumably it is a loan over a period of time. Ecuador doesn’t deliver they don’t get the rest of the money.

Posted by Danny_Black | Report as abusive

What about the social and environmental responsibility? China does not follow those rules…

Posted by respbeing | Report as abusive

Thailand went to IMF, got advice, went down and would have took the rest of Asia with it as even Japan, Korea, China was not immune to it. Luckily China ignore the pain it received and put the breaks on the currency and created an anchor which saved the rest of the Asian economies.

Article subject is so badly biased that it only serve to create negative imagery against china and sensationalism. Trading electric plant for oil is not a big deal for small countries who need the infrastructure but lack cash.

Trade and politics should be separated and if western countries couldn’t lower their high-horse attitudes, then China will fill in all the trade blanks with whatever nations.

Posted by prastagus | Report as abusive

prastagus, what rubbish. The Asian economies experienced a sharp drop and then bounced back with the notable exception of Malaysia – who notably did what Foppe thinks was the “right thing” – which took nearly a decade to get back to where it was before the crash. China was only saved from a massive banking and local government crisis by Clinton’s decision to make it a favoured trading partner. Of course, one needs to ask what is going to bail it out of the current local goverment and banking crisis….

China is one great ponzi scheme at the moment and once the insiders have cleaned out all the dumb money then like all ponzi schemes it will collapse.

Posted by Danny_Black | Report as abusive

Felix, um, Argentina has been rather beholden to Hugo Chavez regarding debt finance, contrary to your claim that “Argentina still does whatever it wants to do, and is beholden to nobody”. See e.g.,

Posted by norge10 | Report as abusive

norge10 and the fastest growing importer of Venezuelan oil is……

Posted by Danny_Black | Report as abusive

“Article subject is so badly biased that it only serve to create negative imagery against china and sensationalism. Trading electric plant for oil is not a big deal for small countries who need the infrastructure but lack cash.” **applause**

Listenning to the IMF was our ruin 20-10 years ago. We were (I’m from Argentina) in one of the worst crisis of our history thanks to the IMF, and the IMF admmited recently that they made HUGES mistakes with us. So F**k the IMF and any neo-liberal economist who tries to speak about what is good for us.

Posted by Nehx | Report as abusive

“Sold itself to China”? Sounds like a grossly unjustified exaggeration.

Posted by EdwinaLee | Report as abusive

Nehx, yeah had nothing to do with Argentinians running up huge amounts of foreign currency debt.

Posted by Danny_Black | Report as abusive

What’s your point? Isn’t a public sector debt of 20 or 25% relatively modest these days. Many modern economies have public sector debts approaching 100% of GDP.
Seems a bit of a cheap shot to single out Ecuador these days.

Posted by mwebb19 | Report as abusive

In fact, the CIA World Factbook says 104 countries have larger public debt to GDP ratios – all the way up to Japan with 225%.
Whatever Ecuador’s economic problems might be, public debt is not one of them, and borrowing a few billion from China will not significantly change that.

Posted by mwebb19 | Report as abusive

mwebb19, what interest rate is Ecuador paying and what rate is Japan paying on it’s debt? What are the servicing costs?

Posted by Danny_Black | Report as abusive

A question has been raised: why debt with China doesn’t show as external debt in Ecuador?
The thing is that the Ecuadorian government has gotten a little creative and now makes companies (mostly dams) with little capital where the main debtor is this company, not the state. In the case of oil, Petroecuador is the debtor, not the government. Of course, in the end the Government owns those companies. But THE GOVERNMENT DIDN’T TAKE THAT DEBT DIRECTLY.

note: I’m Ecuadorian and know how Chinese do business with the government. Makes the IMF a saint!

Posted by berniebec | Report as abusive

It seems that China is the “saviour” of the world: It helps Spain, Greece and other countries in Europe by providing them with loans, and it is investing heavily in Africa and in South America.

This is the result of actions created by the debtors themselves: If countries (and people) had lived within their means, they would not have needed assistance to get out of this whole mess.

Posted by Laowaiblog | Report as abusive

Mr. Salmon,

I would urge you to better measure your headline titles. It is because of overstatements like these that conflicts begin, followed by herd behavior.

You have a big responsibility in your hands.


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Posted by education1234 | Report as abusive

Ecuador is asking now the amount of 9,239 million for this year. If we add the fact that they already owe 24.4% of GDP and could easily surpass a deficit of 600 million. Then we have a country that could easily surpass 30% of GDP debt by the end of 2014. By the time Correa finishes his term he will have a debt easily of 60% of GDP. His economic program is a mess. All income tax of Ecuador goes to pay his bureocracy, 90% of oilt has already being mortgaged to China and he is puzzle as to why China is not interested in lending him any more money. The 1.7 billion loan from China was not even handed to Correa was actually to pay directly for the Cocoa Sinclair project. Ecuador is set up to lose its sovereignty, economic policy is being dicated by the Federal Reserve. Political policy is being dictated by socialismo XXI which started as Project Condor, Project camelot, Manchurian candidate, Trojan Horse,,then you understand what has been happening in Ecuador.

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