Ecuador to Divorce the U.S. Dollar?

August 30, 2010, 2:46 PM EDT  By Nathan Gill

Aug. 30 (Bloomberg) — Ecuador’s foreign reserves dropped to the lowest level since July 2009, heading for their biggest monthly decline since May, as government cash deposits at the central bank fell.

Foreign reserves in Ecuador have declined 8.4 percent this month to $3.53 billion, the central bank said today on its website. Reserves have declined 23 percent from this year’s May high of $4.57 billion, according to the report.

The government’s deposits are “extremely low,” reflecting dwindling state funds, which could lower bond prices and jeopardize the country’s use of the dollar as its currency, said economist Vicente Albornoz, chief executive of the Cordes research institute in Quito.

“The reserves are an expression of the fact that the government doesn’t have much money,” Albornoz said today in a telephone interview from Quito. “The government doesn’t have any buffers to support future shocks. Without buffers and financing sources, this could be a danger for the country.”

The extra yield investors demand to hold Ecuadorean dollar bonds instead of U.S. Treasuries widened nine basis points, or 0.09 percentage point, to 10.33 percent at 2:37 p.m. New York time, according to JPMorgan’s EMBI+ index. Ecuador’s spread has widened 2.64 percentage points this year, compared with 0.21 percentage point for the index.

Ecuadorean government debt is the second-riskiest after Venezuela’s among 15 developing nations tracked in JPMorgan’s benchmark emerging-markets index.

Ecuador’s central bank, which lowered its 2010 forecast for economic growth to 3.7 percent from 6.8 percent on Aug. 10, increased the amount of deposits that financial institutions must keep in the country in February to boost liquidity and shore up dollarization, central bank President Diego Borja said in a June interview. Borja said at the time there was no need for Ecuador to quit using the U.S. dollar as its official currency.

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