Ecuadorean Planning Minister Diego Borja (whom I interviewed a few times in his first stint as economy minister and always seemed to be a reasonable man) yesterday said the country's dollarisation system is ''faltering.´´ The term he used, flaqueando, means more weakening than anything else. The thing is, no matter what the translation is, the connotation is negative.
The currency regime is weakening. Funny, Ecuador is running out of dollars because of the erratic signals the Rafael Correa administration sends investors, not because of the dollar weakness/strength. The recent capital flight of about $1.5 billion in the past two months is putting the future of dollarisation at jeopardy; the place is riskier than other countries at some point -- but this administration isn't interested to acknowledge that. Remittances are falling, oil -- the biggest export of this Andean nation, -- is depressed ... To us, this is nothing but the first step towards imposing capital controls.
Writes Alberto Bernal, strategist at Bulltick LLC in Miami: ''We think that the introduction of even stricter capital and import controls is a matter of time. We also think it likely that the government will be forced to introduce deposit redemption controls if the current trend does not ameliorate. We think that one of the key goals of the TV interview of Minister Borja was to place the blame of the current travails of dollarisation on the private banking sector, and not on the inconsistencies of the current government policy guidelines.´´ As clear as day. What seems even more absurd, not say annoying is that Borja insists that the government wants to defend dollarisation at all cost. Huh! Dollarisation goes against the principles of the Correa government. Why defend it then? defending dollarisation implies, in an environment where there is no control over monetary policy, fiscal discipline. We know that anything is possible in the axis of pro-Bolivarian countries but fiscal restraints.
But the original purpose of this blog is to talk about the Latin America private sector, their channels of financing and the challenges they face amidst the crisis -- not the typical government policy talk. Bulltick's Bernal makes a very strong point here, talking about the private sector in Ecuador: ''Ecuador's private sector still owes international creditors around $6.9 billion. Therefore, if Ecuador were to leave dollarisation, then the private sector would be left with a non-payable liability, and widespread bankruptcies and ample unemployment would likely follow.´´ If Ecuador quits the dollar, the chances that the local private sector continues to service their dollar debts would be very little. Does it sound like Argentina? Bernal says yes. ''Therefore, the only option available for the Correa administration would to 'pesify´the assets of the banking sector, which would imply an immediate bankruptcy of the financial system, because the asset-liability mismatch would prove to be violent. This is, of course, unless the President is willing to take the political cost of pesifying the deposits of the Ecuadorian population as well, an issue that would likely carry major political costs.´´
You know what I think? Correa will do it.
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