This would not necessarily be a problem. The bank''s board clearly has no concept on how to stabilize the sucre. Moreover, under a currency board regime, monetary policy would become automatic, eliminating the need for substantive personal oversight. Mahuad has called a special session of Congress to convene Tuesday at 10 a.m. He claims to have opposition support for a variety of fiscal reforms that ultimately would be needed to shore up the currency board, but we are not as sure.
Political risk remains high.
Wall Street analysts generally are skeptical the plan will work. Their reasoning is mostly wrong, though, as their chief argument is that fiscal balance and a functional banking system must be attained prior to implementation of a board. In reality, fiscal balance is not necssary for a currency board. You simply need to be able to finance whatever deficits you have. We expect Ecuador to address fiscal deficits via a combination of partial default on sucre-denominated obligations, spending cuts, tax hikes, sale of state assets, and possible restructuring of some dollar debt.