Superb article -The Ecuadorian Miracle and the Crisis of Liquidity

Great stuff -- as long as the oil boom lasts.

Ecuador has had two other cycles of commodity-led booms in roughly the past century (cacao in the early 20th century, bananas in mid-century). When each commodity boom ended, they were followed by periods of coups and instability.

That doesn't mean that this boom will end the same, of course.

BobH wrote:

Great stuff -- as long as the oil boom lasts.

Ecuador has had two other cycles of commodity-led booms in roughly the past century (cacao in the early 20th century, bananas in mid-century). When each commodity boom ended, they were followed by periods of coups and instability.

That doesn't mean that this boom will end the same, of course.

Much would probably depend on the timing. All the upgrades in infrastructure, education, etc, were, and are much needed. Unfortunately the pay off for all those things will be years down the road. If oil prices remain at these levels then things may very well workout. If oil prices fall substantially in the next several years as some have predicted, then would be hard to imagine Ecuador would be able to escape massive unemployment, and a large percentage of projects essentially ending overnight.

"Ecuador seems now a wholly owned subsidiary of China" sums up the current state of affairs.  It would appear this will end badly for Ecuador, not a matter of "if" but rather "when".  The effects on expats should be minimal, as inflation is not yet a factor.

mugtech wrote:

The effects on expats should be minimal, as inflation is not yet a factor.

Depends -- IF there is an oil price collapse causing economic instability (which seems quite possible, though far from certain) and IF the economic instability leads to political and social instability (which would be likely), then things could become unpleasant, maybe even dangerous, for expats.

Luckily, there should be plenty of warning signs and enough time to get out, IF that should happen.

Things would have to be pretty extreme to have any kind of major impact on expats.  Assuming the majority of them have an income source outside of Ecuador, which most probably do. Not like the people of Ecuador haven't gotten used to political, and economic instability. Even if things do go south, not sure that translates into expats being in that much danger.

Plus as Bob said, there should be plenty of warning.

j600rr wrote:

Plus as Bob said, there should be plenty of warning.

Of course I have no more idea of how it will play out than anyone one else.....

There is a very interesting documentary film called "My Perestroika" filmed in Moscow that followed the lives of a group of Russians through 20 years and into their middle age documenting the last days of the Soviet Union and then into the present.

In one insightful interview with one of them, the Russian tells the interviewer that on television one day all the TV programming disappeared and a film of The Nutcracker ballet began to play over and over again in a continuous loop, and that it went on for days. A few days later they discovered that the USSR was no more. The government was gone, the currency was worthless, there was no distribution of goods - it was all gone. Just like that.

It happened in a matter of days.

Very good film actually, I recommend it if you can find it.


-Edit-
Before someone calls me on it, I misspoke myself. The ballet was Swan Lake, not the Nutcracker.

Sounds fascinating gardener. If you can remember the title, I'd love to watch it.

"My Perestroika"


-I'm always waiting for that moment here. I'm a night owl and in the wee hours more and more frequently comes the emergency alert (just a test) on the TV music station I listen to. I'm always waiting for that emergency alert to become the only permanent programming. Kind of like the old test pattern.

LOL -- I don't read very well sometimes. I see now that you put the title in your earlier post. Thanks.

It's like the Hemmingway quote:

How did you go bankrupt?"
Two ways. Gradually, then suddenly.

http://video.pbs.org/search/?q=My+Perestroika


Should be the right link. If not just go onto PBS and type in the title. Should show up.

Thanks for the recommendation Gardener. Looks like will be a good watch.

Another positive is the use of USA dollars, just keep a majority of them in USA banks and the risk should be minimal.

mugtech wrote:

Another positive is the use of USA dollars, just keep a majority of them in USA banks and the risk should be minimal.

From the lying blackguard mainstream media no less:

De-crowning the dollar, and the 'collapse' ahead
http://www.cnbc.com/id/101133131

And this,
How America will collapse (by 2025) Four scenarios that could spell the end of the United States as we know it -- in the very near future
http://www.salon.com/2010/12/06/america_collapse_2025/

And this too,
China, Russia, and the End of the Petrodollar
http://dollarcollapse.com/dollar-5/chin … trodollar/

I just can't stop,
China and Brazil to sign trade deal for local currency at summit of BRICS nations
http://www.foxnews.com/world/2013/03/26 … s-nations/

One more,
Russia Announces Decoupling Trade From Dollar
http://www.informationclearinghouse.inf … e38165.htm

And many many more. America nor the dollar are immune to bad economic policy, money printing, and debt off-shoring.

gardener1 wrote:

And many many more. America nor the dollar are immune to bad economic policy, money printing, and debt off-shoring.

Very true, but in those cases there will be world wide problems, so geography won't make much difference.  If any of those predictions are true, then one does not want to be in a place based on the US dollar.

Smiling at you Mug. 

Sorry if I went off the rails for a bit.

To me, just as an investor might seek geographic diversification of investments it is my personal view that people should consider diversification of their life:

- Be a citizen of one country (e.g., the U.S.)
- Be a resident of another country (e.g., Ecuador)
- Keep your assets in a third country (e.g., Switzerland)

To me, this three-legged stool approach allows maximum flexibility and risk mitigation.

The largest obstacle historically was establishing a non-U.S. investment account (for U.S. citizens). But, in my opinion it is now easier than ever for U.S. citizens to open Swiss investment accounts.  While some investment firms saw risk with unreported accounts of U.S. citizens and chased them away a few years ago, other Swiss firms have embraced FATCA and set up SEC-registered advisory firms to serve U.S. citizens with asset custody in Switzerland.  These accounts - fully reported as with any other investment account in the U.S. - permit easy diversification of investment assets (and cash) among USD and all other non-USD currencies in a non-U.S. country.

SawMan wrote:

To me, just as an investor might seek geographic diversification of investments it is my personal view that people should consider diversification of their life:

- Be a citizen of one country (e.g., the U.S.)
- Be a resident of another country (e.g., Ecuador)
- Keep your assets in a third country (e.g., Switzerland)

To me, this three-legged stool approach allows maximum flexibility and risk mitigation.

The largest obstacle historically was establishing a non-U.S. investment account (for U.S. citizens). But, in my opinion it is now easier than ever for U.S. citizens to open Swiss investment accounts.  While some investment firms saw risk with unreported accounts of U.S. citizens and chased them away a few years ago, other Swiss firms have embraced FATCA and set up SEC-registered advisory firms to serve U.S. citizens with asset custody in Switzerland.  These accounts - fully reported as with any other investment account in the U.S. - permit easy diversification of investment assets (and cash) among USD and all other non-USD currencies in a non-U.S. country.

Is this a fairly recent development with the Swiss investment accounts SawMan? Usually try to stay updated on these things. Must be slipping. Anyway if what you say is true, then that's very good news.

j600rr wrote:

Is this a fairly recent development with the Swiss investment accounts SawMan? Usually try to stay updated on these things. Must be slipping. Anyway if what you say is true, then that's very good news.

I'd say it's been improving for the past few years.  Certainly, UBS and Credit Suisse are still opening accounts despite having been slapped pretty hard for allegedly assisting U.S. citizens commit tax evasion.  Meanwhile, others such as the large Cantonal bank (a canton is like a state in the U.S.) Zurcher Katonalbank (ZKB) terminated all accounts of U.S. citizens and shows no sign of wanting them back.  One reason likely is that ZKB still has some pesky indictments to deal with.

I use (and am NOT a paid spokesman for) Vontobel Swiss Wealth Advisors, an SEC registered firm with an office in Dallas, Texas:
https://www.vontobel.com/INT/EN/Private … US-clients

The actual custodian of the investment assets is Bank Vontobel AG in Zurich, Switzerland.

The principal in the Dallas office is Oliver Hohermuth (214) 459-3250.  Again, I'm trying to give the benefit of what I learned and went through and am not in any way some shill for this firm. I have just been very pleased at the service and quality of reporting.

Here's a link to another SEC-registered Swiss firm catering to U.S. citizens.  It is much smaller, but remember that they do not custody assets (not a Madoff situation).  This advisor also uses Bank Vontobel AG in Zurich to custody their clients' assets, or at least they used to.

SawMan wrote:

Here's a link to another SEC-registered Swiss firm catering to U.S. citizens.  It is much smaller, but remember that they do not custody assets (not a Madoff situation).  This advisor also uses Bank Vontobel AG in Zurich to custody their clients' assets, or at least they used to.

Neglected to provide the link to this firm (ask for Markus Grieb if you call their Zurich office):

http://www.s-a-advisors.com/

SawMan wrote:

SawMan wrote:

Here's a link to another SEC-registered Swiss firm catering to U.S. citizens.  It is much smaller, but remember that they do not custody assets (not a Madoff situation).  This advisor also uses Bank Vontobel AG in Zurich to custody their clients' assets, or at least they used to.

Neglected to provide the link to this firm (ask for Markus Grieb if you call their Zurich office):

http://www.s-a-advisors.com/

Cool.
Thanks for the info. and links.

Part 2 is out, but a pretty dry read. A lot of banker hijinks, international loan sharking, sovereign debt and the like.


There is this highlight:

"On the heels of the startling World Bank loan in April, in July of this year, 2014, the Executive Board of the World Bank approved a loan of US $205 million to the Municipality of Quito in Ecuador to construct a metro line that will carry 400,000 people a day once the project is built.

"This is the first project of its kind in Ecuador.  Correa has made it a national and local priority.  It is supported and co-financed by the national government and by the Municipality of Quito. The Quito Metro Line One Project (PLMQ) involves an investment estimated at $1.499.9 billion. The line will be 23 kilometers long with 15 fully accessible stations, six with integrated access to the Metrobus-Q network, and initially be capable of carrying 23,000 people an hour in each direction. Quito Metro Line One will link the principal points of departure and arrival of transit passengers in Quito, and will service an area in which some 760,000 jobs are located"


http://www.dailycensored.com/the-ecuado … -part-two/

Thanks for posting the link dailycensored.com.
Very interesting information!
Can't stop reading.

gardener1 wrote:

Part 2 is out, but a pretty dry read. A lot of banker hijinks, international loan sharking, sovereign debt and the like.


There is this highlight:

"On the heels of the startling World Bank loan in April, in July of this year, 2014, the Executive Board of the World Bank approved a loan of US $205 million to the Municipality of Quito in Ecuador to construct a metro line that will carry 400,000 people a day once the project is built.

"This is the first project of its kind in Ecuador.  Correa has made it a national and local priority.  It is supported and co-financed by the national government and by the Municipality of Quito. The Quito Metro Line One Project (PLMQ) involves an investment estimated at $1.499.9 billion. The line will be 23 kilometers long with 15 fully accessible stations, six with integrated access to the Metrobus-Q network, and initially be capable of carrying 23,000 people an hour in each direction. Quito Metro Line One will link the principal points of departure and arrival of transit passengers in Quito, and will service an area in which some 760,000 jobs are located"


http://www.dailycensored.com/the-ecuado … -part-two/

Gotta wonder who will benefit from this construction and operation of the Quito metro line.  Will it be cheap enough and efficient enough to be used by 400,000 or close to it every day?  Will it unsnarl the street traffic?  Unfortunately there is a history of the construction companies and the international loan sharks making all the money while Ecuador is saddled with the debt.  Usually these things are masked or worded in such a way that by the time anyone has it figured out it is too late to change.  Good luck, Ecuador.

mugtech wrote:

gardener1 wrote:

Part 2 is out, but a pretty dry read. A lot of banker hijinks, international loan sharking, sovereign debt and the like.


There is this highlight:

"On the heels of the startling World Bank loan in April, in July of this year, 2014, the Executive Board of the World Bank approved a loan of US $205 million to the Municipality of Quito in Ecuador to construct a metro line that will carry 400,000 people a day once the project is built.

"This is the first project of its kind in Ecuador.  Correa has made it a national and local priority.  It is supported and co-financed by the national government and by the Municipality of Quito. The Quito Metro Line One Project (PLMQ) involves an investment estimated at $1.499.9 billion. The line will be 23 kilometers long with 15 fully accessible stations, six with integrated access to the Metrobus-Q network, and initially be capable of carrying 23,000 people an hour in each direction. Quito Metro Line One will link the principal points of departure and arrival of transit passengers in Quito, and will service an area in which some 760,000 jobs are located"


http://www.dailycensored.com/the-ecuado … -part-two/

Gotta wonder who will benefit from this construction and operation of the Quito metro line.  Will it be cheap enough and efficient enough to be used by 400,000 or close to it every day?  Will it unsnarl the street traffic?  Unfortunately there is a history of the construction companies and the international loan sharks making all the money while Ecuador is saddled with the debt.  Usually these things are masked or worded in such a way that by the time anyone has it figured out it is too late to change.  Good luck, Ecuador.

True enough Mugs, but this is only a $200 million dollar loan, which is nothing by today's standards. The majority is being funded by the national government, and Municipality of Quito. Think they probably should be ok. Plus there latest return to the bond market went pretty well.

http://online.wsj.com/articles/ecuador- … 1403044004

I'm far from convinced the long term economic future for Ecuador is as bright as some people want to promote it as being, but don't really seeing this loan being anything that would have any real negative impacts. Of course I'm also wrong quite often, so take my thoughts, and anything I say with a grain of salt.

j600rr wrote:

True enough Mugs, but this is only a $200 million dollar loan, which is nothing by today's standards. The majority is being funded by the national government, and Municipality of Quito. Think they probably should be ok. Plus there latest return to the bond market went pretty well.

http://online.wsj.com/articles/ecuador- … 1403044004

I'm far from convinced the long term economic future for Ecuador is as bright as some people want to promote it as being, but don't really seeing this loan being anything that would have any real negative impacts. Of course I'm also wrong quite often, so take my thoughts, and anything I say with a grain of salt.

It starts out as a $200 loan, but what if the resulting cash flow will not sustain the service with all the required maintenance and improvements?  Then Quito and the national government are left holding the bag, meaning the taxpayers pay.  I hope that will not happen, but the overly rosy future projections are set up to have it fail after the capitalists get paid.

j600rr wrote:

I'm far from convinced the long term economic future for Ecuador is as bright as some people want to promote it as being, but don't really seeing this loan being anything that would have any real negative impacts. Of course I'm also wrong quite often, so take my thoughts, and anything I say with a grain of salt.

I'd say you're not alone.  I think Ecuador has wonderful opportunities, but (like many other countries) over-extended itself in debt.  Consider that Ecuador's S&P credit rating of 'B' places it in such fine company as Congo, Ethiopia, Jamaica, Rwanda and Uganda, which have the same credit rating.  In fact, other than Argentina (which is nearing collapse again) with a credit rating of CCC-, Ecuador trails its peers.  Some selected countries for comparison:

Panama         AAA
El Salvador    AAA
Chile              AA+
Mexico             A+
Peru                 A
Colombia         A-
Brazil           BBB+
Guatemala   BBB-
Paraguay      BB+
Honduras        B+

SawMan wrote:

j600rr wrote:

I'm far from convinced the long term economic future for Ecuador is as bright as some people want to promote it as being, but don't really seeing this loan being anything that would have any real negative impacts. Of course I'm also wrong quite often, so take my thoughts, and anything I say with a grain of salt.

I'd say you're not alone.  I think Ecuador has wonderful opportunities, but (like many other countries) over-extended itself in debt.  Consider that Ecuador's S&P credit rating of 'B' places it in such fine company as Congo, Ethiopia, Jamaica, Rwanda and Uganda, which have the same credit rating.  In fact, other than Argentina (which is nearing collapse again) with a credit rating of CCC-, Ecuador trails its peers.  Some selected countries for comparison:

Panama         AAA
El Salvador    AAA
Chile              AA+
Mexico             A+
Peru                 A
Colombia         A-
Brazil           BBB+
Guatemala   BBB-
Paraguay      BB+
Honduras        B+

Which translates into more government debt at higher rates, then resulting in the ravages of high interest rates compounding every year, with more debt required just to pay the interest, as in the USA.

mugtech wrote:

It starts out as a $200 loan, but what if the resulting cash flow will not sustain the service with all the required maintenance and improvements?  Then Quito and the national government are left holding the bag, meaning the taxpayers pay.  I hope that will not happen, but the overly rosy future projections are set up to have it fail after the capitalists get paid.

Fair enough. That is definitely a possibility. I missed seeing that angle.

Ecuador has really double-downed on its precarious financial condition - from pledging half its gold reserves to Goldman Sachs to accepting pre-payment from China for oil yet to be delivered.  Miss a payment to China and they'll wish they were dealing with a Mafia loan shark! 

http://www.bloomberg.com/news/2014-07-0 … cmpid=yhoo

Excerpts:

Ecuador, the serial defaulter that used half its gold reserves this year as collateral for a loan from Goldman Sachs Group Inc., pledged $2 billion of future oil production to China for additional financing.

The OPEC-member country disclosed the China deal in an offering circular to bond investors last month. Under the May agreement, Unipec Asia Co., a unit of China Petroleum and Chemical Corp., known as Sinopec (386), prepaid for oil from PetroEcuador over an unspecified timeframe.

Ecuador has more than tripled public spending since President Rafael Correa took office in 2007, and the country plugged budget deficits by borrowing more than $11 billion from China in the past five years after a 2008 default hobbled its ability to borrow in international credit markets. In addition to the $400 million loan from Goldman Sachs, Ecuador tapped international bond markets last month for $2 billion.

Home to South Americas third-largest oil reserves and untapped copper reserves similar to those of Chile and Peru, the worlds top producers, Ecuador has granted Chinese companies access to copper mines and oil fields since the default.

The government faces a record budget deficit this year of $4.5 billion, Finance Minister Fausto Herrera told reporters in Quito on June 24.

SawMan wrote:

Ecuador, the serial defaulter that used half its gold reserves this year as collateral for a loan from Goldman Sachs Group Inc., pledged $2 billion of future oil production to China for additional financing.

Which explains why there will be no vote on the Yasuni drilling. How could the Chinese be paid without expanded drilling?

BobH wrote:

Which explains why there will be no vote on the Yasuni drilling. How could the Chinese be paid without expanded drilling?

Who needs a vote!  The article states that China already has been granted access to mining and oil fields.

The vote would have potentially forbidden the drilling.

But that's off-topic, for which I apologize.

I enjoyed your update on informing us of our reality here in this country.  Impressively well written!  Buen trabajo, Gypsy