8 March 2016 - 07:53 PM
The Banking Crisis That Nearly Destroyed Ecuador's Economy
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Seventeen years ago a banking crisis that had simmered for years finally boiled over.

Ecuadoreans protest the neoliberal measures adopted by the government of Jamil Mahuad in order to save the banking industry in 1999.

On March 8, 1999, Ecuadoreans awoke to find that the country's banks were closed.

The government of former Ecuadorean President Jamil Mahuad announced a “banking holiday” that was meant to last only a day but ultimately lasted five.

Ecuadoreans were outraged, scenes of people trying to break down the doors of banks played on television.

Mahuad delivered a nationally televised address to the country to announce dramatic measures to “save” the country's banking system.

The measures adopted would come to be seen as part of the worst financial crisis in the history of Ecuador.

“We have given the impression of being a government without leadership, without a plan and without initiative. That is not the case, we will begin to correct this today,” said Mahuad.

The government's plan of action was to freeze bank accounts with more than US$500 for a year.

it was all part of an effort to rescue the private banking industry from a crisis generated as a result of their own failure to maintain liquidity.

The state transferred millions to the banks in order to help keep them solvent, but ultimately 16 banks would close as a result of the crisis, including the two largest banks.

The priority of the Mahuad government was to save the banks, not the deposits of Ecuadoreans.

The ire of Ecuadoreans at the government's neoliberal measures was so great that a popular uprising eventually forced Mahuad out of office long before his term was completed.

A commission set up in 2007 to investigate the crisis found that the irresponsible behavior of the banks was facilitated by state policies, namely a law from 1998 that had the state guarantee all deposits and absolve banks from maintaining sufficient liquidity.

The commission attributed the favoring of the interests of banks over people to the close relationship between politicians of the day and the heads of the private banks.

The consequences of the banking crisis were so severe that Ecuador is still living with them. Millions were forced to flee the country due to massive unemployment.

The crisis also led to the country abandoning its own currency in favor of the U.S. dollar in January 2000.

The “dollarization” of the economy has caused difficulties for the current government. As an example, Ecuador's neighbors have deliberately devalued their currency, making Ecuadorean exports relatively more expensive.

Since the arrival of the Rafael Correa presidency, the government has taken a series of measures to prevent such a crisis from ever happening again.

Some of the very politicians heavily involved in the 1999 crisis, such as Guillermo Lasso and Jaime Nebot, remain active in Ecuadorean politics and are some of the fiercest critics of the Correa government.

Although Ecuadoreans seemingly learned from the experience, it would appear that the rest of the world did not.

A similar story would play out in the United States almost a decade later and, like Ecuador, the U.S. government chose to bail out the banks on the backs of the people. A point that Senator Bernie Sanders has repeatedly made on the campaign trail in his quest to secure the Democratic nomination.

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