A Prediction on Ecuador’s Next Currency

bolivar121908.jpgAlthough it may not be apparent from my recent blog posts, I have just completed a week-long business trip to Latin America.  Among the many interesting topics in the news my colleagues and I have been discussing is Ecuador’s decision to default on its bonds – not because they don’t have the money, but rather that President Rafael Correa (a U.S. educated economist who has been slowly pushed into the orbit of Hugo Chavez, thanks to American neglect) believes that the former administration accrued these debts in bad faith.  Call it a politically motivated sovereign default.

One impact of Correa’s decision to stop servicing debt is that the country will likely be forced to abandon the dollar, according to Goldman Sachs.

But now we have a big problem:  how can Ecuador successfully de-dollarize and bring back the Sucre?  This is the problem that economists call “original sin” – and other than Liberia in the 1980s I can’t think of any country that has been able to wean itself off dollars.

So here’s my wild and crazy prediction:  Ecuador could just choose to adopt the Venezuelan Bolivar.  It would be an absolutely unprecedented, unwise, and largely political statement – in other words, exactly what both Chavez and Correa would love to do.  Maybe even the Russians could kick down $20 billion as a FOREX starter.

In these strange times, I think we have to learn a new mantra of “never say never.”