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Best Bitcoin Card for Ecuador

Anyone who hasn’t liked Bitcoins now gets the crisis all the more. Ecuador wants to be the first country to introduce a crypto currency as official currency. The proposed law is ready. President Correa is allowed to sign it without any objections.

The currency does not yet have a name

It will be the second official currency besides the USD. Ecuador had abolished its own currency in 2000 and replaced it with the USD. Like many other countries in South America before it, Ecuador had considerable problems controlling inflation. In 2000 the inflation rate reached 100%. A popular antidote was the peg of one’s national currency to the USD. Ecuador went one step further and replaced its own currency.

Since then, inflation has returned to a normal level. Since the end of 2013, however, it has been rising again. One reason for this is the explosion in government spending. President Correa has launched numerous projects that are ultimately intended to help combat poverty. This is laudable, but it also costs money. Since Ecuador has no currency of its own, the government needs USD in order to be able to make any expenditure at all. The supply with USD has become more and more difficult in the last quarters. Ecuador’s current account deficit has been growing for years. More dollars are flowing out of the country than into it.

The calculation cannot work out in the long run

In order to be able to continue financing expenditure, Ecuador has pledged large parts of its raw materials or deposited them as collateral for loans. China granted Ecuador a loan of USD 2 billion. In return, Ecuador will cede USD 2 billion of oil to China over the next few years. Ecuador received a loan of 400 million from Goldman Sachs. Half of the gold reserves are used as collateral.

The budget deficit for 2014 should be between 4 and 5% of GDP. That is USD 3.6 to 4.5 billion. This means that the government could run out of money again as early as the beginning of 2015. Ecuador is running into a debt trap, even though they had actually budgetted quite well since 2000. The government spent less than it received. Debt fell from 90% of GDP to below 20%. Now they are spending again and debts are being made as if there were no tomorrow anymore. If the government maintains the current pace, there will be a serious problem in a few years.

If Ecuador continued to hold on to the USD, the hands of the government would be tied at some point. At some point it will run out of gold and oil to pledge. There would be a compulsory debt freeze. With a current debt of 24% of GDP, however, this is not yet really necessary. In theory, the government has scope for further spending without slipping into over-indebtedness. Not all planned expenditures really make sense. Ecuador apparently takes Venezuela as a role model. The fact that this is not good in the long run is shown by the unrest that keeps flareing-up in the country.

But the dice have been cast in the meantime

The government wants to spend whatever it costs. In order to be able to do that, it needs its own currency. If they were to abolish the USD altogether and reintroduce the Sucre, there would be an even higher risk of inflation, capital flight and so on. That is not a good solution. The parallel currency is intended to remedy the situation. USD would then be used primarily for trade. With the current reserves, Ecuador can get by much longer. Nevertheless, they will not last forever. Ecuador has an estimated financing requirement of USD 35 billion by 2017. The currency reserves stand at 4 billion. So a lot has to be replaced with the crypto currency.

The government’s plan is to pay civil servants in the new currency. Social benefits are also to be paid in crypto currency. The government will be able to make most of its public spending in the new currency. It still lacks the income for it, but can easily get into debt in the new currency and does not have to resort to dubious transactions with US banks and pawn the country.

The big danger, of course, is that the government will over-exploit the possibilities of the new currency and the debt will explode. Ecuador has not had a tried and tested central bank since the introduction of the USD. This does not necessarily increase the chances of a great success story. The ban on all other payment methods, e.g. by the Bitcoin, is not encouraging.

That is a very conspicuous behaviour

If, on the other hand, the experiment succeeds, then the digital currencies will provide further impetus. Ecuador’s crypto currency has nothing to do with the previous ones, as it is regulated by the central bank. This is exactly what currencies like Bitcoin are supposed to prevent.

The control of the digital currency by a central bank does not detract from the scope of the experiment. What a currency is called and who controls it ultimately doesn’t matter if you look at the advantages of digital currencies. Many advantages result solely from the fact that the currency is digital and not from a controlling authority. The power of banks can be enormously limited by digital currencies. Consumers can protect their assets from poor bank management. In addition, they do not necessarily need accounts with financial institutions that cost money again and bring little added value.

Ecuador can start a real revolution here, provided that the government is sensible enough not to misuse the currency to sink the country into inflation and debt.