Kate Mackenzie China wants oil, Ecuador wants money…

Ecuador features in the latest episode of the “China resources grab!(TM)”.

China is paying the Opec member $1bn up front for 69m barrels of oil over two years, and local newspapers report China is providing Ecuador with a loan of a further $1bn in oil at an interest rate of 7.25 per cent.

On the face of it, a price of $14 – $15 a barrel looks to be a good deal for China. The details of the loan, too, are not to be sneezed at from China’s point of view – but Ecuador is not in a position to be especially choosy.

As the FT reports, Ecuador is running perilously low on liquidity and has been somewhat limited in where it can seeks funds.

Naturally, accounts differ about how it got into this situation. Falling oil prices in the second half of last year left the country short of a key source of revenue, while remittances from Spain and the US also fell as the recession took hold. But critics argue the country’s problems go back further than this, blaming the leftist government, led by Rafael Correa, for over-ambitious social spending that was only sustained by the commodities boom.

Either way, a default on $3.2bn worth of foreign debt last year has somewhat limited the country’s options. Ecuador argues the loans, undertaken by a previous government, were illegitimate, but this has left it seeking help from places other than the international bond markets. It has borrowed almost $1bn from the Andean Development Organisation (CAF) and the Latin America Reserve Fund (FLAR), and is expecting a $500m loan from the Inter-American Development Bank. Last year it secured a $40m credit line from Iran.

Related links:

Ecuador defaults on sovereign bonds (FT, 12/12/08)
China gets busy (FT Energy Source, 20/02/09)
Why Chinese oil investment is good for everyone (FT Energy Source, 27/04/09)