Author Topic: The End Of Dollarization In Ecuador: The Crisis Has Begun  (Read 2074 times)

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Offline mayya

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The End Of Dollarization In Ecuador: The Crisis Has Begun
« on: June 25, 2015, 18:37:09 PM »
The End Of Dollarization In Ecuador: The Crisis Has Begun


 
BY EZEQUIEL VÁZQUEZ-GER
06/24/2015 05:48 PM ET


Every year major companies, organizations and even countries pay big bucks to advertise during the Super Bowl in hopes of reaching its multimillion viewers. This past February, a small sliver of time on Super Bowl Sunday was dedicated to Ecuador in a 30-second commercial coining the hashtag "#AllYouNeedisEcuador."
The irony of this commercial is that it encourages Americans to spend U.S. dollars in Ecuador at a time when the Ecuadorean government is trying to weaken the U.S. dollar as its official currency.

In 2000, Ecuador dollarized its economy, and implemented its dollarization with a transparent accounting system. The system assured that the deposits of financial institutions into the central bank would be completely backed by foreign exchange reserves. The move was designed to restore credibility to Ecuador's financial system in international credit markets by making it impossible for the government to issue fiat currency.

The country reaped the benefits of this sound monetary policy until shortly after 2008, when newly elected President Rafael Correa began to block public access to information, eliminating the transparency of the system.

At the same time, a new law permitted the central bank to use its foreign reserves in order to make "investments" in the country, through the acquisition of public bonds.

In other words, money that should have been used to back dollarization began to finance public spending. The dollarization was no longer supported exclusively by foreign exchange reserves but was now also backed by government bonds, which are not liquid assets.

This change in policy played a crucial role in the deterioration of the country's fiscal situation, reflected in growing levels of debt and an unsustainable fiscal deficit. By the end of 2014, the level of public spending accounted for 44% of GDP while the deficit in public spending accounted for 5%. By March 2015, total debt (both internal and external) reached $32 billion, nearly doubling the $16.1 billion debt recorded four years prior in 2010. If the $7 billion it has already received — and spent — from China for oil that it hasn't shipped yet are included, the debt is even greater.

On May 25, Correa's government responded to the situation by releasing a mandate forcing the country's banks and financial institutions to adopt a new electronic currency. Though Correa's administration uses euphemisms such as "financial inclusion" and "modernization of the payment system" to justify the mandate, its true motivation is implicitly the search for alternative methods to put an end to the dollarization system.
 

http://news.investors.com/ibd-editorials/062415-758828-ecuador-weakens-us-dollar-as-its-official-currency.htm