The people of Ecuador are rising up to refound their country as a pluri-national homeland for all. This inspiring movement, with Ecuador's indigenous peoples at its heart, is part of the revolution spreading across the Americas, laying the groundwork for a new, fairer, world. Ecuador Rising aims to bring news and analysis of events unfolding in Ecuador to english speakers.

Sunday, July 25, 2010

Ecuador Government Fails To Pass Monetary Law, For Now

July 20 QUITO (Dow Jones)--Ecuadorean President Rafael Correa's party failed to garner enough votes in Congress to pass a controversial monetary reform bill that would give the central bank the use of deposits to fund investment projects, but it hasn't given up on the plan.

Correa's party, Alianza Pais, secured only 59 votes Tuesday, four short of the 63 needed to pass laws in the 124-seat legislature. The failure is Correa's second recent congressional defeat, after the party was unable to get enough votes in May for a bill to overhaul water usage. He is also struggling to find sufficient backing for communications and education bills.

The president of the legislature, Fernando Cordero, a member of the government party, plans to present the monetary policy reform bill again next week for another vote, since the opposition also lacked sufficient votes to bury it. Some analysts fear the bill, if passed, could compromise the country's financial stability.

It could have "potentially disastrous consequences," said Ramiro Crespo of Analytica Securities, an investment bank based in Quito.

Central bank deposits include public-sector funds, revenue from oil exports, loans from multilateral lenders and minimum reserve requirements from private banks.

The monetary bill seeks to reduce the bank's accounting systems for dollar reserves to three from four, merging the separate accounting of private-sector deposits into a miscellaneous system, together with the reserves of state-owned banks. It would also allow the central bank to place short-term bonds on domestic and foreign markets and to invest in domestic short-term securities regardless of whether they are public, private, financial or non-financial.

The central bank would be allowed to invest up to a quarter of the miscellaneous system funds in these operations.

The proposed law suggests the central bank could invest directly in state-owned banks, and would also be allowed to provide liquidity to institutions "with some questionable lending policies and high non-performing loan ratios," Crespo said. The reforms would also allow the central bank to invest directly in debt issued by local companies, debt that wouldn't have to be listed on a stock exchange.

According to Crespo, the reform wouldn't provide transparency, but would give more discretionary power to the central bank officials, particularly its board of directors.

Central bank President Diego Borja said Wednesday that the bill offers clarity on Central Bank money, and what part could be used to boost national production. "The objective of the reform is to mobilize the national savings for local investment, but if the law isn't approved it doesn't prevent the continued use of the national savings to encourage national production," he added.

Marcos Lopez, a former member of a central bank board said the bill would allow the monetary authority to act as a commercial bank, giving loans, and reducing its capacity to respond to an eventual liquidity crisis in the country.

"The funds that the central bank has are from public and private entities, from private banks," Lopez said. "In an eventual crisis, if the depositors demand their money the bank couldn't respond with immediate liquidity, and with that the dollarization system could even be in danger," Lopez said.

Ecuador adopted the U.S. dollar as its currency in 2000 following a severe bank collapse that led to $8 billion in losses.

Correa's administration has been rattled by the recent protests against several of its proposed laws, including proposals on hydrocarbons reform, communications, and university education. On Wednesday, Cordero suspended a session to vote on the universities bill amid protests by opposition lawmakers.

In the case of the hydrocarbons bill, the deadline is July 25, but if lawmakers fail to get enough votes to change or reject it, it will become law automatically because it was sent as an "urgent" law.

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