China Bank Approves $2 Billion Loan to Finance Ecuador Budget

Ecuador signed a $2 billion loan with China Development Bank Corp., its second in less than a year, as the Asian nation seeks to secure energy and commodities supplies to meet demand in the world’s second-biggest economy.

The agreement was signed in Beijing yesterday, Ecuador’s Finance Ministry said in an e-mailed statement, without providing more details. Finance Minister Patricio Rivera said June 14 the loan will be used to finance budgeted public works projects and will have a maturity of eight years.

China is the world’s largest energy consumer and has become the South American nation’s biggest credit source since Ecuador defaulted on $3.2 billion of bonds in 2008 and 2009. The Asian nation has loaned Ecuador, the Organization of Petroleum Exporting Countries’ smallest member, at least $6.68 billion since 2009 for projects ranging from the construction of a hydroelectric dam to cash advances to guarantee future crude shipments to China.

“This type of loan shows investors that Ecuador is worthy of credit, at least for the Chinese,” said Paul Palacios, the president of Albion Casa de Valores SA, the nation’s third-largest brokerage.

State-owned China Development Bank is the country’s largest overseas lender with $134.6 billion in foreign currency loans last year, Chairman Chen Yuan said May 31. The volume of foreign currency loans increased more than eightfold during the past five years, according to the bank’s 2010 annual report.

Ecuador Loans

Yesterday’s loan comes on top of the $1 billion that PetroChina Co., the Asian nation’s largest oil producer, released in February in exchange for future oil sales. Ecuador negotiated a similar deal with China for $1 billion in 2009.

Ecuador got a separate $1 billion, four-year loan from China Development Bank last year for infrastructure projects at an interest rate of 6 percent. The Export-Import Bank of China in June 2010 agreed to finance a $1.68 billion, 1,500-megawatt hydropower plant known as Coca-Codo Sinclair in the Amazon region. China’s Sinohydro Corp. will build it.

The yield on Ecuador’s 9.375 percent bonds maturing in 2015 fell three basis points, or 0.03 percentage point, to 9.57 percent as of 5:21 p.m. New York time yesterday, the biggest drop on a closing basis in almost two weeks. The price of the security rose 0.09 cent to 99.31 cents on the dollar, according to data compiled by Bloomberg.

The Andean country’s dollar debt yields 806 basis points more than U.S. Treasuries, the second-most among 15 emerging markets tracked by JPMorgan’s EMBI+ index, after Venezuela. Debt from Argentina, which defaulted on $95 billion in 2001, yields 622 basis points more than Treasuries.

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