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Ecuador: Bank cleansing on the agenda

Ecuador's financial crisis came to a head in mid-March. With 10 banks closed or subject to state intervention in the past nine months, depositors have lost confidence. A major run on the banks was only avoided when the government declared a week-long bank holiday on March 8 and imposed a freeze on $1.5 billion in sucre and dollar deposits, for up to a year. Already struggling to cut a severe fiscal deficit, the government could not make good immediately on last year's legislation guaranteeing deposits. Now it is looking for help from international auditors and multilateral financiers to cleanse, downsize and recapitalize banks.

The Ecuadoran state has acquired alarmingly large exposure to the financial sector reckons Quito-based consultancy Multiplica. As a result of the state's "rescue" measures since 1996, it controls 39% of financial-sector assets, 42% of loans, 35% of deposits and 64% of profits, Multiplica reports. Liquidity and contingency loans to the financial sector by the central bank now exceed $900 million with an increase of $200 million in March alone. To hold down resulting pressures on inflation and the exchange rate, the government froze deposits.

But of most concern to many analysts is how, and at what cost, the state can make good on its pledge to guarantee deposits as more and more banks come under its wing.

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