Skip to main content

JPMorgan Says Not to Worry as Ecuador Promotes Digital Currency

By Nathan Gill
(Bloomberg) -- Ecuador’s home-grown digital currency is nothing to fear. At least that’s the conclusion of analysts from JPMorgan Chase & Co. to Credit Suisse Group AG and Nomura Securities International Inc.

The country’s bonds fell last week after the government ordered banks to start accepting a new electronic tender it created last year. Previously, officials had said the system would be voluntary. Investors are concerned that President Rafael Correa plans to use the dinero electronico to wean the nation off its official currency, the U.S. dollar, and eventually start creating virtual money to plug a budget gap.

The bond selloff, and the concerns, were overblown, the analysts say. Javier Kulesz, a managing director at Nomura, said he isn’t worried about a sudden end of dollarization because the government has said it will keep liquid reserves to back the digital currency. Oil prices will be more important in determining how the country’s dollar bonds perform than the virtual tender, according to Acadian Asset Management LLC portfolio manager Holger Siebrecht.

“As far as I’m concerned, this is noise,” said Boston-based Siebrecht, who helps manage about $350 million of emerging market debt, including Ecuadorean bonds. “We see these things from time to time in emerging markets, that a news item comes across and there’s some short-term, knee-jerk reaction.”

Always Voluntary

The extra yield investors demand to own Ecuadorean bonds instead of Treasuries, a measure of risk perception in credit markets, rose the most in two months last week, jumping 0.52 percentage point to 7.35 points, data compiled by JPMorgan show. The so-called spread trails only Ukraine, Venezuela, Belarus and Belize among developing countries worldwide.

The new measures require banks to offer services tied to the electronic coin, giving lenders with assets greater than $1 billion 120 days to fulfill the requirement, while smaller banks will get as long as a year, according to a resolution published in the nation’s official register May 25.

The rule change will give users more opportunities to use the digital currency, which will continue to be completely voluntary for private citizens, the central bank’s press office said in response to questions from Bloomberg.

“What changes is that those citizens who voluntarily have decided to use the electronic money will be able to do it at all of the banks in the financial system,” the monetary authority said.

Oil Prices

Concern about the OPEC nation’s economy has grown over the last year as prices for its crude oil, which made up about half of Ecuador’s 2014 export revenue, slumped to an almost six-year low in January. While Ecuador’s Oriente oil prices have climbed 49 percent to $57.00 a barrel since then, the government is still on track to post the biggest budget deficit on record.

So investors in Ecuador should be focused on the outlook for crude and the government’s ability to fund itself, not the use of an e-currency, Nomura’s Kulesz said in a note May 28.

“There are lots of things to worry about in Ecuador, but this is not it,” Kulesz wrote.
Still, last week’s banking rules revived questions about how the government plans to use the new currency in the future and officials’ long-term support of dollarization, according to Sarah Glendon, an economist at Gramercy Funds Management LLC.

‘Contingency Plan’

“I have never gotten a logical explanation from the government as to why the central bank is the intermediary for this e-money, whereas in other countries, it is commercial banks,” Glendon said from Greenwich, Connecticut. “I view the e-money as a contingency plan that is setting the stage for eventual de-dollarization. Not immediate, but eventual.”

Correa, who’s likened dollarization to boxing with one hand, is a vocal critic of Ecuador’s use of the greenback. Still, he and his cabinet members have repeatedly said they have no plans to abandon the dollar.

“We think the authorities are strongly committed to the politically popular dollarization regime, at least through the 2017 election cycle,” Benjamin Ramsey, an economist at JPMorgan in New York, said in a May 29 research note.

Juan Lorenzo Maldonado, an economist at Credit Suisse in New York, said in a note to clients it doesn’t seem there are immediate plans by Ecuador to use the electronic currency to make payments to suppliers or employees.

“Officials completely discarded any intentions of doing so, and we take their word at face value,” he said.

Comments

Popular posts from this blog

Moving to the Suburbs: Reducciones in Recent Latin American Historiography

In 1503, the Spanish monarchy issued its first decree for the resettlement of indigenous groups in the Caribbean so that they would “live together” and “not remain or wander separated from each other in the backcountry.”[1]

As the European conquest spread to North, Central, and South America, these new settlements – known as reducciones and congregaciones in Spanish and descimentos in Portuguese – became sites of forced labor, evangelism, experimental agricultural, and refuge. Through a series of imperial policies decreed over the next decades and centuries of colonial rule, Spanish and Portuguese officials attempted to reshape the New World, including its human and natural landscapes. How colonial historians explain this process and indigenous peoples’ reactions to it is the focus of this essay.

In a review of the recent historiography of reducciones, several trends emerge that signal a shift in our understanding of the practice. As this paper will show, one common element is that …

77-Year-Old Wall Street Favorite to Face Fujimori in Peru Runoff

By Nathan Gill and John Quigley April 12, 2016 (Bloomberg) -- The victory by Pedro Pablo Kuczynski, a former finance minister, for second place in Sunday’s Peruvian president elections sets up a showdown between two business-friendly candidates, part of a regional backlash against left-wing politicians.
Kuczynski, a 77-year-old Oxford-trained political economist who’s spent more than 50 years championing debt control and free trade, won 21 percent of vote with 96 percent of the ballots counted, according to the electoral office. He will face Keiko Fujimori, who won 39.8 percent, in a second-round vote on June 5.
Click here to read the full story on Bloomberg News.

Bailout Risk Grows for Ecuador After Worst Earthquake in Decades

By Nathan Gill April 19, 2016 (Bloomberg) -- Before a 7.8-magnitude earthquake struck Ecuador on Saturday, the South American nation’s finances were already in tatters as the government struggled to meet payments to municipal authorities, oil companies and even cancer hospitals. Cut off from global bond markets, President Rafael Correa must now find enough money to rehouse thousands.
As volunteers continue to rescue victims from the rubble of collapsed homes and buildings on Ecuador’s Pacific coast, doubts are growing about the country’s ability to pay for the reconstruction. The nation is already in its worst recession since the financial system collapsed in the late 1990s, and international reserves are at their lowest levels in almost seven years.
Click hereto read the full story on Bloomberg News.