Mary Anastasia O’Grady in The Wall Street Journal:
Ecuador’s Phony Bitcoin Ploy
President Correa’s new ‘electronic currency’ will make it easier to engage in monetary devaluation.
Few economic injustices are more villainous than stealing from the poor. Yet this is what a government does when it devalues its currency. Pope Francis has stressed the Christian obligation to share with the least of our brothers. Devaluation actually takes from them what they have earned themselves. And while the inflation tax that follows hits everybody, it wallops the low-income population the hardest.
Ecuador engaged in this insidious practice repeatedly throughout most of the 20th century. The little nation took a giant step in 2000 when it adopted the U.S. dollar as its currency to put an end to theft-by-devaluation. But last month President Rafael Correa pushed through Congress a law to permit the creation of what Ecuador calls a new “electronic” currency. So now the central bank again has a vehicle that will allow it to conjure money out of thin air to finance a political agenda.
Ecuadoreans are not free to speak against this threat to their earnings and savings. Mr. Correa is well known for using the judicial system and the army to threaten and silence his critics. Earlier this month he won the passage of a new law that makes it a crime—punishable by up to seven years in prison—to “publish, broadcast or spread” news that creates “economic panic.” The law suggests that the brash University of Illinois-trained economist is well aware of the trouble his funny money is likely to cause.
Venezuela’s Nicólas Maduro and Argentina’s Cristina Kirchner, both fellow travelers of the Ecuadorean president, have driven their economies into the ground. Compared with them, Ecuador’s dollarized economy looks better. Seven years after Mr. Correa took power, Ecuador reports an average annual gross domestic product growth rate of 4.3% and a drop in the poverty rate to 26% from 38%.
Still, economic statistics compiled by an authoritarian state should always be viewed with some skepticism, as should a June poll that purportedly found the president has a 61% approval rating. Even the government’s numbers are hardly miraculous. According to development economists, it takes GDP growth of better than 6% for a decade to authentically move people out of poverty. Dollarization has made people better off by protecting their savings and earnings, but Ecuador has achieved no progress in economic competitiveness, the linchpin of growth. Instead Mr. Correa has run the country on the fumes of high-price oil and borrowing.
In 2008 Ecuador repudiated $3.9 billion in foreign debt. The government had the money to pay its creditors, but the president had other plans for those funds. So Mr. Correa justified the default by alleging that the debt, incurred by previous governments, was “illegitimate” and that bondholders were “real monsters.” Then he went on his own spending tear.
This year Ecuador will run a fiscal deficit, including debt service, of some $9.2 billion, more than 9% of GDP. That’s what happens with budgeting that forecasts that oil prices will grow to the sky. It will be hard to shrink bloated state payrolls and subsidies, and the cost of servicing rising debt levels isn’t getting any cheaper.
To return this year to the international capital markets with a $2 billion 10-year bond, Ecuador had to pay a whopping 7.95% coupon. It also took out a $400 million three-year loan from Goldman Sachs GS +0.18% against Ecuadorean gold to meet budget shortfalls. China holds $11 billion in Ecuadorean debt, not including billions of dollars in loans from Beijing secured by future oil shipments at an undisclosed price.
Now Mr. Correa is planning for when he runs out of other people’s money. The central bank says its new money will be a parallel currency backed up by dollars or the “equivalent” and used to pay its 500,000 bureaucrats in a “hygienic” manner. But if so, why not use dollars? In today’s world, there’s nothing special about transferring money electronically. Implying that this is a “virtual” currency is an attempt to lend Bitcoin-like cachet to what will essentially be IOUs issued by a country with a rather dodgy credit history. Coming from a president who ran for office in 2006 pledging to de-dollarize an economy renowned for bouts of hyperinflation, this is more than disconcerting.
Pope Francis is not oblivious to the consequences of monetary meddling. In his November 2013 “apostolic exhortation,” he wrote: “Debt and the accumulation of interest also make it difficult for countries to realize the potential of their own economies and keep citizens from enjoying their real purchasing power.”
That’s an excellent if somewhat cryptic summation of what may be the most ubiquitous cause of persistent poverty in the world: government fiscal profligacy and the monetary devaluation that follows it. The pope’s statement goes to the heart of why Mr. Correa is building the escape hatch to get out of dollarization, and what will happen to Ecuadoreans when he uses it.
Write to O’Grady@wsj.com