In an effort to fund its big spending on social programs and public-works and save dollar reserves, Ecuador is creating a virtual currency which, according to analysts, will be used to pay bills to local creditors, says Bloomberg.
Ecuador’s legislative branch passed a law last month to start
a digital currency not unlike Bitcoin that will be used together with the U.S. dollar, the official legal tender of Ecuador. The new currency, which hasn’t been named yet, will be backed by “liquid assets,” governed by a new monetary authority, and in use as early as October.
Given its sliding oil reserves and impeding account deficits that drain precious dollars from its economy at a record pace, Ecuador may be tempted into using the new currency to fund its increasing spending by compensating workers and contractors, says Landesbank Berlin Investments.
“This is usually the start of debasement, inflation and depreciation,” said Lutz Roehmeyer, a manager of a major Landesbank Berlin fund of emerging-market assets that include Ecuadorian debt. Roehmeyer has been investing in Ecuador for 15 years and predicted the country’s last two defaults correctly. He’s planning to cut his firm’s holdings of the nation’s debt that Ecuador sold in June.
Most analysts interviewed by Bloomberg were skeptical about the introduction of this new currency, since successful creation of new currencies isn’t easy even for countries “with a perfect track record of successful economic management”, says Steffen Reichold, an economist at Stone Harbor Investment Partners LP.
We think that Ecuador’s creative ways for tackling deficit reduction is probably not good news for the world economy. According to credit rating agency Moody’s Investors Service, Ecuador has a rating of Caa1, which means that it is at risk of default; Moody has a list of 10 other countries that are near bankruptcy. But Ecuadorians
are cunning: five years ago they tricked their lenders into thinking they’ll default, saying they won’t be able to repay $3 billion in bonds. And, then bam!, the bonds plunged to about $0.30 for every borrowed dollar and Ecuador quickly bought 90% of the cheap bonds, wiping out the debt and saving $2 billion.
Also, we wonder whether Ecuador’s current problems and this
new currency they intend to use could help in tipping the scales in favor of the gold market. Perhaps. By the way, Ecuador for sure doesn’t want that because they might be “betting that the price of gold will fall 20% over the next three years.” Maybe they know something that most of us don’t, they ARE tricky.
Image by Xramp