Home - Yahoo! - Help

[ Business | US Market | By Industry | IPO | AP | S&P | International | PRNews | BizWire | CCN ]

Ecuador seen as test for U.S. dollarization law

By Marjorie Olster

DALLAS, March 6 (Reuters) - Ecuador will be a key litmus test for U.S. lawmakers considering legislation to make it easier for emerging economy nations to drop their currencies and adopt the dollar, U.S. Senator Connie Mack said on Monday.

Mack, who introduced the dollarization legislation last year, said it might be an easier sell if a less volatile country than Ecuador had decided to make the switch first. He was speaking at a dollarization conference sponsored by the Federal Reserve Bank of Dallas.

Last week, Ecuador's Congress approved a bill to adopt the U.S. dollar as its main currency as part of a controversial government plan to stabilize and stimulate an economy mired in its worst crisis in five decades.

``How dollarization plays out in Ecuador could have an impact on how this legislation will proceed,'' Mack said.

The International Monetary Stability Act, introduced by Mack last year, would allow the U.S. Treasury to encourage emerging countries to adopt the dollar.

The legislation does not currently have broad enough support in Congress to pass and dollarization is still a relatively obscure topic on Capitol Hill, Mack said.

Ecuador was not the first Latin American nation to adopt the dollar - Panama did so almost a century ago and Argentina pegs its peso to the U.S. currency.

But Ecuador's experience will be keenly watched by those, like Mack, who believe more widespread dollarization would bring greater stability, prosperity and investment to the region and expand a potentially huge market for U.S. exports.

Mack acknowledged that Ecuador, which has one of the most volatile economies in the world, might not have the best chances of success at dollarization in the region.

He said it will be easier to get his legislation passed if Ecuador does well, adding he would have preferred to see another country, which has made greater progress on issues like taxes, budgets and regulatory reforms, to be the first to go.

``My own preference would be a nation like Argentina,'' Mack said.

Ecuador declared a moratorium on foreign debt payments last year as total public foreign debt reached more than $13 billion, equal to its gross domestic product.

The economy contracted 7.5 percent last year and the national currency, the sucre, lost two-thirds of its value. Inflation hit 90.8 percent for the year ending in February.

Dollarization would help end the vicious cycle of inflation that has plagued Latin America for decades, Mack maintained.

The dollarization legislation will not be passed until key congressional leaders, like Senate Banking Committee chairman Phil Gramm, throw their support behind it, he added.