Financial Crisis in Ecuador (1999)

Overview

• Year: 1999
• Context: Greatest financial and social crisis in Ecuador.

Origin of Crisis

• Key Figures:
  • Sixto Durán Ballén
  • Alberto Dahik
• Economic Policies:
  • 1994: Creation of the Law of Financial Institutions
    • Liberalized interest rates
    • Allowed free circulation of capital
    • Increased linked credits without control
• Consequences of Policies:
  • Speculation
  • Capital flight
  • Bank failures

Escalation of the Crisis

• Jamil Mahuad's Presidency:
  • Policies exacerbated the situation
  • Financial power emerged, with bankers financing Mahuad's campaign
• Bank Bailout Policies:
  • Millionaire loans to banks via public institutions
  • Creation of Deposit Guarantee Agency (AGD) to cover private banking debts

Key Events

• March 8, 1999:
  • Declaration of a 24-hour "bank holiday" (lasted 5 days)
  • Suspension of all financial operations
  • Announcement by Superintendent of Banks, Jorge Egas Peña, that financial entities would not open
• Deposit Freeze:
  • Accounts over 2 million sucres frozen for 1 year
• Outcome:
  • Banks declared bankruptcy; State absorbed costs
  • Shifted burden to the population through:
    • Reduction of social spending
    • Increase in service costs

Consequences of the Crisis

• Severe economic outcomes:
  • Inflation
  • Devaluation
  • Recession
  • Company bankruptcies
  • Increased unemployment
  • Heightened poverty and indigence
  • Loss of lives and suicides
• Economic Loss:
  • Estimated at $8 billion
• Social Impact:
  • Largest migratory wave in Ecuador's history

Dollarization

• January 2000:
  • Adoption of dollarization at a rate of 25,000 sucres per dollar (was 4,000 sucres)
  • Frozen savings in sucres lost value (only recovered one fifth)

Migration Trends

• Migration predominantly to:
  • Northeastern United States
  • Spain
  • Italy
• Formation of Ecuadorian communities in cities like New York, Madrid, and Milan

Reflection Questions

• Was dollarization a long-term solution for economic stability in Ecuador?
• Personal experiences with the bank holiday?