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:

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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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