Latin American Politics
Elections are in the air! With the national Ecuadorian elections coming in just four weeks the politicians are outdoing themselves. I already mentioned in a n earlier post… A Long Line of Women, about an aid program for women with children that has massive lines snaking around the old air terminal to apply for a $35 benefit. It turns out that this is a pre-election largesse that is being sponsored by the local Alcalde (Mayor) of Guayaquil. This is a $350,000 US program, basically to buy votes from the poorest people. It will probably work, too.
Other political machinations are less beneficial. In what at first glance seems more bluster than substance, a number of the Presidential Candidates are playing a game of one-upmanship about the Ecuadorian National Debt.
Some back ground: The country owes 18 billion dollars in bonds, and the Federal government of Ecuador pays the highest interest on bonds in Latin America. This is partly due to Ecuador defaulting on all of its bonds in 1999. The resulting financial crisis caused over 1000% annual inflation and a desperate measure to abandon the currency at the time, the Sucre, and Ecuador began using the US Dollar as its currency.
Well, the “dollarization” of the Ecuador economy worked to stabilize the economy, but the Ecuadorian government’s penchant for buying votes with pricey government programs hasn’t stopped. In the past, when it promised more than it could spend the government would just print more Sucres. But now it can’t print US Dollars so it is in a bind. This last year the government of Ecuador’s Ignacio Palacio has promised hundreds of millions of dollars in aid to a wide range of special interest groups. To cover this spending, the government first passed a law requiring a 50% tax on oil revenues from the petroleum companies operating in Ecuador, then trumped up a dispute with Occidental Petroleum and seized the profitable oil fields operated by the US company.
That high-handed approach has shaken foreign investment in general and the oil industry in particular. This is bad because oil exports is the Ecuadorian government’s primary source of hard cash.
So now we get to the politics. The last two weeks the various presidential candidates have been saying they will default on the current Ecuador Debt, stop making payments on these loans, so they can use the money from debt payments to spend on special programs “for the people of Ecuador.” It has gotten so bad that investors have completely run for the exits. Ecuador’s Bonds have plummeted. They probably can’t sell new bonds even if they wanted to.
So whoever the next president will be will have built up a massive expectation for gargantuan spending programs. But where will the money come from? Oil production is dropping because oil companies refuse to put more investment into Ecuador because of the shaky investment climate. The President can’t print money because the economy is based on the US Dollar. He won’t be able to borrow money except at truly ruinous rates.
Ecuador has averaged a new President every 15 months for the last eight years, because they keep getting thrown out of office. Whoever is elected may only have 12 months to keep everyone happy AND keep the economic axe from falling.
News at eleven.
Other political machinations are less beneficial. In what at first glance seems more bluster than substance, a number of the Presidential Candidates are playing a game of one-upmanship about the Ecuadorian National Debt.
Some back ground: The country owes 18 billion dollars in bonds, and the Federal government of Ecuador pays the highest interest on bonds in Latin America. This is partly due to Ecuador defaulting on all of its bonds in 1999. The resulting financial crisis caused over 1000% annual inflation and a desperate measure to abandon the currency at the time, the Sucre, and Ecuador began using the US Dollar as its currency.
Well, the “dollarization” of the Ecuador economy worked to stabilize the economy, but the Ecuadorian government’s penchant for buying votes with pricey government programs hasn’t stopped. In the past, when it promised more than it could spend the government would just print more Sucres. But now it can’t print US Dollars so it is in a bind. This last year the government of Ecuador’s Ignacio Palacio has promised hundreds of millions of dollars in aid to a wide range of special interest groups. To cover this spending, the government first passed a law requiring a 50% tax on oil revenues from the petroleum companies operating in Ecuador, then trumped up a dispute with Occidental Petroleum and seized the profitable oil fields operated by the US company.
That high-handed approach has shaken foreign investment in general and the oil industry in particular. This is bad because oil exports is the Ecuadorian government’s primary source of hard cash.
So now we get to the politics. The last two weeks the various presidential candidates have been saying they will default on the current Ecuador Debt, stop making payments on these loans, so they can use the money from debt payments to spend on special programs “for the people of Ecuador.” It has gotten so bad that investors have completely run for the exits. Ecuador’s Bonds have plummeted. They probably can’t sell new bonds even if they wanted to.
So whoever the next president will be will have built up a massive expectation for gargantuan spending programs. But where will the money come from? Oil production is dropping because oil companies refuse to put more investment into Ecuador because of the shaky investment climate. The President can’t print money because the economy is based on the US Dollar. He won’t be able to borrow money except at truly ruinous rates.
Ecuador has averaged a new President every 15 months for the last eight years, because they keep getting thrown out of office. Whoever is elected may only have 12 months to keep everyone happy AND keep the economic axe from falling.
News at eleven.
posted by Unknown at 9:03 AM
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