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To: Ahda who wrote (47029)	1/13/2000 2:53:00 PM
From: Ahda	Read Replies (1) \| Respond to of 116764

Ecuador's Mahuad Rolls the Dollarization Dice: David DeRosa By David DeRosa Ecuador's Mahuad Rolls the Dollarization Dice: David DeRosa (David DeRosa is president of DeRosa Research and Trading and manages an investment fund. He is also an adjunct finance professor at Yale School of Management. His opinions don't necessarily represent those of Bloomberg News.) New Canaan, Connecticut, Jan. 12 (Bloomberg) -- Desperate times call for desperate measures. You could hang that banner on the office of the president of Ecuador, Jamil Mahuad Witt, who made a snap decision this weekend to dollarize his country. Ecuador and its currency are in a virtual freefall. Mahuad is grasping for any way to stop the hemorrhage and wanted to secure the value of the currency. His idea is to replace the Ecuadorean sucre with the U.S. dollar at a rate of 25,000 sucres to $1. As is the case with Panama, the original and, to date, only country to dollarize, the sucre would remain in circulation for a while and then disappear. Not everyone cottoned to this idea. To be specific, the head of the Ecuadorean central bank, Pablo Better, who only days earlier had stated that neither a currency board nor dollarization was under consideration, quit on the spot. Cabinet resignations followed. Yet Mahuad is adamant and it looks like he'll get his way. There were some initial protests but now it looks like the body politic in Ecuador is backing dollarization. Dollarization first became a big topic of discussion last May when former Argentine President Carlos Menem proposed converting Argentina from a currency board into a fully dollarized economy. Menem was so enthusiastic about dollarization that he proposed it for all of South America. The idea was pretty much retired from discussion when he handed over the presidency to his successor, Fernando de la Rua. Divvy Up the Spoils? Still the idea periodically finds supporters in unlikely places. For example, U.S. Senator Connie Mack, a Republican from Florida, has introduced a bill called the ``International Monetary Stability Act of 1999.' The bill asserts the U.S. should ``encourage official dollarization by offering to share with countries that become officially dollarized a portion of the extra seigniorage earning that the United States would earn.' Seigniorage refers to the free interest that a central bank implicitly collects from having people hold the nation's currency. In effect, a central bank's ability to issue currency is tantamount to its receiving an interest-free loan from the general public. If Ecuadoreans hold dollars, the seigniorage goes to the U.S. Federal Reserve. Mack's bill makes interesting reading because it contains an actual algebraic formula on how the seigniorage would be divvied up between the U.S. and the country that chooses to dollarize. This brings up a fine point. Mahuad may be leaving a nice chunk of change on the bargaining table. He has in effect made a unilateral decision to adopt the dollar as Ecuador's currency. The decision was made under duress because his poor country is going over the falls in a barrel. Apparently he didn't have time to make a deal with the U.S. on the seigniorage issue. Maybe it's not too late to negotiate. Pay Uncle Sam Still maybe the Fed should get all of the seigniorage. Consider it a fee for providing a stable currency. And there is risk to the U.S. from having an economically unstable emerging- market country using its currency. If Ecuador implodes after it has dollarized, you can bet your boots traders are going to sell the dollar. Of course this would be more of an issue if one of the larger Latin American countries, like Argentina or Brazil, were to dollarize. I have to admit that in some sense dollarization is like an instrument of the Monroe Doctrine for international finance. One hemisphere, consisting of North and South America, with one currency, the Yankee greenback. And no euros allowed! Maybe that's going to be the drill for the new century. Forget political alliances and go for currency blocks. The euro may have started a new craze. Whatever pans out, you can safely assume the future of dollarization in Latin America and the career of Jamil Mahuad Witt now ride on what happens in dollarized Ecuador. If this plan, which seems good in theory, fails in practice, dollarization will be discredited. Except for Panama, and that was a special case, this kind of thing hasn't been tried before. But if it works, and if Ecuador shows economic improvement, then hello to a dollar destiny.