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European investment banks squeeze Ecuadoran oil sector

Several European banks have stopped financing Ecuadorian oil company Petroecuador amid rising pressure, including legal exposure and reputational risks. This comes off the heels of the EU's statement that it will bar funding for most fossil-fuel projects, cutting around €2 billion by the end of 2021. As of 2019, 1,115 institutions with more than $11 trillion in assets have divested fossil fuels. European investment banks' move to stop financing Petroecuador reflects that institutions appear to reflect that institutional mandate.

While Petroecudaor has rebutted that it compensates communities with infrastructure developments, concern about stranded assets and rising public opinion on the matter has made oil financing tricky for major banks. Credit Suisse, ING, and BNP Paribas have ended financing for companies Petroecuador over new environmental finance regulations that emphasize looking at the risk to the environment and surrounding communities.

The banks' move primarily stems from the legal exposure that could arise from pollution and reputational risk from the negative social consequences.

While environmental advocates celebrate the change, the operational challenges for Petroecuador have the potential to seriously weaken an economy where oil accounts for over 50% of export revenues and 30% of taxes. Meanwhile, Ecuador's continued debt restructuring and IMF conditionality mean that government does not have the fiscal space to further support the national oil company if a finance glut emerges.

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