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The End of Dollarization in Ecuador: The Crisis Has Begun

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ScoobyDoo
8/26/2019 21:36 EST

Someone sent this article to me and I noticed it was dated 2015, but I haven't heard anyone talk about it on any forums. Is the article ridiculous, or do you see aspects of it? I will paste it:

EDITORIALS
The End Of Dollarization In Ecuador: The Crisis Has Begun

6/24/2015
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.

In the absence of liquid reserves — along with a fall in the country's revenues due to the decline in oil prices, and the restrictions on access to external financing — this mandate indicates a lack of resources and interest by the government to find new ways to cover its fiscal deficit.

If one decides to go to the central bank to exchange his dollars for electronic currency, or if the government itself decides to begin canceling obligations or begin paying salaries with electronic currency instead of dollars, then the central bank could either save those dollars as backup, or "invest them" in government bonds to finance public spending — as it has been doing all along.

In this second case, the amount of money in circulation (dollars plus electronic currency) would be larger than its backing in the central bank. As a consequence, the money supply arbitrarily increases, resulting in inflation. This causes the electronic currency to gradually lose its value, signaling the end of dollarization and the eventual adoption of a bi-monetary system.

The situation contains several similarities to Argentina during the last months of the convertibility system in the 1990s. During the convertibility, every peso in circulation should have been backed by a dollar in the central bank, but this did not stop the issuance of new money. In order to finance its public deficit, Argentina needed to issue foreign debt, thus, the issuance of pesos was made against that of external debt.

In the end this situation became untenable, as the Argentine provinces began printing their own money. The most well-known was the "Patacón," a provincial currency in Buenos Aires that was used to pay government bills and state employees during a period when the regular Argentine peso was scarce. After a few months, the combination of pesos, patacónes and other provincial currencies in circulation flooded the money supply in Argentina to the point that their conversion could not backed — leading to the monetary crisis Argentina is in today.

Something similar is happening in Ecuador. Over the last week, social unrest has spread throughout the country. On the surface, the catalyst was the proposed inheritance-estate tax, which prompted Ecuadorians to take to the streets, declaring that their wealth is for their children and not the government. But beneath the surface, the problem is much larger because the public knows that the government's retrograde economic policies are counterproductive.

This lack of public confidence is creating political instability. When Ecuador's citizens reject this electronic currency and rush to exchange it for dollars, the situation will become even more chaotic. These types of self-induced economic crises, once they become obvious both domestically and internationally, tend to spiral downward quickly. There are plenty of reasons to believe Ecuador's crisis has already begun.

• Vázquez-Ger is the director of the Center for Investigative Journalism in the Americas. Twitter: @ezequielvazquez

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Johninnv
8/27/2019 16:20 EST

Well Scooby....the article you published was from a far far fringe organization that ceased publishing anything in 2017. 4 years have passed since it publication so we have the ability to "see" forward in time and see if his ridiculous unfounded blathering had any merit and....guess what.......it didn't. Maybe you ought to question that "someone" who sent it to you and put their credibility right up there with Sarah Hucksterabee Sanders.

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Fredonia
8/27/2019 17:02 EST

total hogwash!

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gyuris
8/27/2019 18:30 EST

That article is pure undulterated B.S. by some correista guy.

Yes, back in 2015 (when Pres Correa was still in power), because the oil revenues suddenly dropped and the government was caught with its pants down, the correista far-left anti-US regime wanted to end the dollarization in EC (mainly so they could print own currency, and play around with the country's debt repayment schedule), but it was such a political hot potato that they didn't dare even bring it up.
Good thing it didn't happen otherwise EC would have been on its way to be just like Venezuela.

I am sure that if the correistas had tried to end the dollarization at any time, it would have caused riots and the overthrow of the gov't. in power, as the Ec people already have done it a few times before.

And, now, with the moderate Moreno administration in power, more than ever, the dollar is here to stay.

A.T.
+++++++

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