Bloomberg News

Ecuador to Require Banks to Buy Government Debt, Mejia Says

July 29, 2011

(Updates with economist’s comment in fifth paragraph.)

July 29 (Bloomberg) -- Ecuador changed its banking laws to require financial institutions to invest part of their reserve requirements in government debt, said Klever Mejia, the central bank’s director of risks.

Private banks must put a minimum of 1 percent of their reserves in government bonds, Mejia said today in an e-mailed response to questions from Bloomberg News. The central bank on July 13 said it was changing banks’ reserve laws to “establish global liquidity levels that guarantee adequate margins of financial security.”

“At least 1 percent of the securities must be issued by the public sector,” Mejia said today.

Ecuador’s Economic Policy Minister Katiuska King on June 1 said the South American nation’s use of the U.S. dollar makes the economy “vulnerable” to international economic crises and limits tools available to offset declining remittances from immigrants in Europe and the U.S.

The Andean country’s reliance on oil to support government spending and limited funding options following a $3.2 billion default in 2008 and 2009 may jeopardize the nation’s use of the dollar, Michael Henderson, a London-based economist at Capital Economics Ltd., said today in a note to clients.

“Limited financing options are likely to turn up the heat on the dollarized economy over the medium-term,” Henderson said.

Ecuador’s Oriente crude, which normally trades at a discount to benchmark West Texas Intermediate, has climbed 22 percent this year to $104.12 per barrel as of yesterday, according to prices compiled by Bloomberg. WTI oil will fall to $97.19 per barrel by the end of the year and average $102 a barrel next year, according to the weighted median estimate of 32 analysts surveyed by Bloomberg.

--Editors: Richard Richtmyer, Marie-France Han

To contact the reporter on this story: Nathan Gill in Quito at ngill4@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at Papadopoulos@bloomberg.net


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