Ecuador May Be Forced to Scrap Dollar After Default

Ecuador’s default on $3.9 billion of international bonds means it’s only a matter of time before the country drops the U.S. dollar as its currency, Goldman Sachs Group has said, Bloomberg reported. Ecuador’s use of the dollar gives President Rafael Correa no outlet for providing credit to the economy as access to foreign financing dries up and revenue from sales of oil, the nation’s biggest export, tumbles. Ecuador joined Panama and El Salvador in adopting the dollar in 2000 to help curb inflation after the sucre tumbled 73 percent against the dollar and the government defaulted on $6.5 billion of foreign debt. While the dollar policy has cut inflation to 9.1 percent from 91 percent in 2000, it provides the government less flexibility as the economy slows, said Albert Bernal, head of fixed-income research at Bulltick Securities Inc. He predicts Correa will reinstitute a local currency within one to two years. “If you can’t grow credit, you can’t grow your economy,” Bernal said. “This will lead them to exit dollarization.”Read more.