The Late 1990's Financial Crisis in Ecuador: Institutional Weaknesses, Fiscal Rigidities, and Financial Dollarization At Work

Luis Jácome

No 2004/012, IMF Working Papers from International Monetary Fund

Abstract: This paper stresses three factors that amplified the 1990s financial crisis in Ecuador, namely institutional weaknesses, rigidities in public finances, and high financial dollarization. Institutional factors restricted the government's ability to respond in a timely manner and efficiently enough to prevent the escalation of the banking crisis and spurred the adoption of suboptimal policy decisions. Public finance rigidities limited the government's capacity to correct existing imbalances and the deteriorating fiscal stance associated with the costs of the financial crisis. Financial dollarization increasingly reduced the effectiveness of financial safety nets, fostered foreign currency demand, and accelerated a currency crisis, thereby further worsening the solvency of banks. These three factors reinforced each other, exacerbating costs as the economy went through a triple banking, currency, and fiscal crisis.

Keywords: WP; central bank; foreign currency; banking crisis; exchange rate; U.S. dollar; institutions; fiscal policy; monetary policy; dollarization; blanket guarantee; interest rate; public finance; banking system; banks equity; bank holiday; deposit withdrawal; Banco de Prestamos; illiquid bank; bank portfolio; bank assets; further bank closure; banking problem; Banking crises; Currencies; International reserves (search for similar items in EconPapers)
Pages: 47
Date: 2004-01-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (25)

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