Ecuador: Ecuador: Financial Crisis, Results And Predictions

Last Updated: 3 September 2001

Suddenly, one Monday in March 1999, all Ecuadorian people were astonished when the Government declared a "banking holiday". The before mentioned "holiday" lasted a whole week. Clients were not only unable to draw out their money but also were obliged to keep their deposits for a year. It sounds incredible but it occurred.

During 1998, under a strong financial crisis, in Ecuador was enacted the creation of the Agency to Guarantee Deposits (AGD). More than twenty banks went into bankruptcy. More than the half of the system was sick. Finally, we find an Ecuadorian State controlling more than 75% of the banking sector. The important decision to eliminate AGD was made on July 2001. After a period of negative results achieved by AGD. Now, the Central Bank will execute AGD goals.

AGD was created not only to protect deposits of hundred and hundred banking clients, but also to recover monies unpaid to the banks. At this point, it is necessary to remember one of the most important causes for the financial system collapse: granting of credits for banks (and bankers) related companies exceeding the legal limits. Then, the main goals of the AGD among others were to collect owed amounts, liquidate banking assets and reimburse deposits to clients.

To collect owed credits AGD was in force to file lawsuits or negotiate with every debtor reasonable conditions for payments. Any action was taken. Result: increasing (more than 70%) of past due obligations in banks owned by Ecuadorian State financial statements.

Why were AGD banking administrators unable to collect past due credits? What is the difference between a private bank managing and a state owned bank managing? The response is "people". Administrators designed by AGD were inefficient enough. Banks owned by the state were used under political criteria. If bureaucracy positions were not available, then those banks were used for that objective.

To liquidate banking assets AGD should have been advised by experts to deal reasonable purchase agreement with international prospective banks. After 30 months of inactivity any of Ecuadorian State closed banks has been sold. Any closed bank liquidation has started up.

Why AGD did not start any procedure for privatization? The response is "people". There has not been any political decision to transfer the property of State-owned bank shares. With no decision it is impossible to begin any procedure of privatization.

To reimburse deposits to affected clients AGD (the State) has made an important effort. But fiscal deficit is a reality, increased by this issue. Public funds were used to cover deposits. Internal debt issuing was used to reimburse funds. That means also that resources obtained by taxes were used to pay affected clients. Taxes were used not only to pay clients but also to cover the irresponsibility of former bank shareholders. Thus the Ecuadorian Budget was unbalanced one more time.

If past due obligations were not collected nor banking assets liquidated and deposit reimbursement was the most important goal of AGD, then the Ecuadorian Budget is affected by a huge black hole (deficit) which must be covered by taxes and debt. That means all Ecuadorians must pay the financial crisis.

During that time, AGD transferred more than US.D $ 4,300 million to cover the collapse. Only one bank received US.D $ 1,200 million (a similar amount was predetermined for the Ecuadorian Crude Oil Pipeline construction, for instance).

Banking supervision has always been questioned. It is incredible to face a financial problem when authorities are supposed to control the system and prevent crisis. All this time, what were the authorities doing? The Ecuadorian Banks Superintendent has been the person called to control, but now we feel the effects of the negligence.

With this background, we need to ask if Superintendence or a Central Bank must execute banking control. The response might be elaborate enough, but it is necessary to state that any public organ (among others: Superintendence, Central Bank, Independent Commission, Ministry, Department) can develop an effective control, but the main requirement for this purpose is honesty.

Ecuador has excellent enacted laws but the problem persists when justice administration is not fair. This item could be elaborated for a future article.

If the Ecuadorian Government wants to solve many problems it must:

  • Have a clean banking sector, very strong, efficient and with international competitors.
  • Purify Ecuadorian Justice in order to punish corrupted bankers.
  • Balance the Public Budget not only by direct taxes paid by Ecuadorian production, but also by an authentic customs collection.
  • Reform Social Security System under a worker/employer co-decision.
  • Privatize telecommunications and electricity.

Ecuadorian National Goals must be stated by a general consensus. Political parties must think of Ecuador as a whole and not as a personal profit source.

Ecuador is intending to prosecute with globalization and make efficient a large public organ. But efforts seem insignificant with extreme poverty existing.

Despite any crisis, if predictions for 2001 fiscal year to have less than 20% as inflation rate (remember Ecuador has experienced inflation rates of more than 90% in past times) and 6.5% economic growth come true, the future may become positive. The main feat for us (government, politicians, bankers, professionals, and workers) is maintaining this rhythm.

Ecuador has excellent sources to push its economic development. External investments can contribute for this goal. After all, Ecuador is a beautiful country.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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