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El Salvador's colón: Fall of a half-baked domino

In May 1999 Euromoney tipped El Salvador to become the first Latin American country since Panama in 1903 to give up its own currency and adopt the dollar. In fact, the central American republic was pipped at the post by crisis-torn Ecuador, which formally dollarized its economy this year.

Michael Peterson

But the decree by El Salvador's president Francisco Flores establishing the dollar as a legal unit of currency from the beginning of next month is significant for two reasons.

Steve Hanke

First, El Salvador has become the first Latin American nation to join the dollar bloc at a time of its own choosing. The president claims to have had the dollarization decree ready in his desk for the past eight months.

Unlike Ecuador or Argentina, El Salvador is not suffering a banking or currency crisis (Argentina set up a currency board in 1992 to stave off hyperinflation). The Salvadoran currency, the colón, was at a steady exchange rate of 8.75 to the dollar for much of the 1990s and the banking sector is strong by Central American standards. El Salvador has long held sufficient foreign reserves to allow it to buy back all the local currency in circulation.

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