Ecuador and China Reach Agreement to Restructure Billions of

For more crisp and insightful business and economic news, subscribe to
The Daily Upside newsletter.
It’s completely free and we guarantee you’ll learn something new every day.

With great financial power, as China is learning, comes great responsibility — or at least a willingness to restructure loans in danger of defaulting.

Case in point: Ecuadorian President Guillermo Lasso announced on Monday his nation reached a deal with China to restructure some $4.4 billion of outstanding debt. The move will save his nation $1 billion between 2022 and 2025.

Restructural Advantages

To increase its influence around the world, China plans to extend $900 billion in loans around the world by 2048 — and Ecuador has done more than its fair share to make that goal a reality. Between 2007 and 2017, the South American country took on a staggering $18 billion in loans from Beijing — primarily while former president Rafael Correa, an anti-US leftist with a soft spot for the Chinese Communist Party, held office.

But tough economic conditions this year (namely declining oil prices) put the nation in jeopardy of defaulting on loan repayments. In February, President Lasso traveled to Beijing to discuss a restructuring deal, and now the details finally got forged in ink:

  • According to a recent report from emerging markets think tank the Institute of International Finance, the restructuring will save the country from a $3 billion funding gap caused largely by falling oil prices, the nation’s top export.
  • “This is a great development for Ecuador,” Lasso told The Wall Street Journal, as his country no longer faces steep cuts to public spending. Rising interest rates have squeezed Ecuador and similar emerging countries from utilizing the global bond market, Sergi Lanau, Institute of International Finance deputy chief economist, told WSJ.

Slippery Deals: Investigators and economists have previously criticized a lack of transparency and the high-interest rates attached to China’s loans in the nation. The deals have thus far proven quite costly, as well. Some of the debt was backed by future Ecuadorian oil sales — enough to tie up nearly $5 billion in lost revenue in some years as the contracts didn’t account for a massive rise in prevailing prices.

Double Default: For its part, China is discovering the hard way that being one of the world’s top lenders has its drawbacks. According to a paper published earlier this year by the World Bank, over 71 emerging market nations have made deals to restructure debt with China between 2008 and 2017 — the vast majority of which merely extend, but don’t reduce, the total sum owed. Let’s just agree to file this away as a tomorrow problem.

You May Also Like

About the Author: AKDSEO