Ecuador Internacional

The End Of Dollarization In Ecuador: The Crisis Has Begun

Investors.com - EZEQUIEL VÁZQUEZ-GER 24/06/2015

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.

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