1998–99 Ecuador banking crisis

The 1998-1999 Ecuador financial crisis was a period of economic instability that resulted from a combined banking crisis, currency crisis, and sovereign debt crisis. Severe inflation and devaluation of the Ecuadorean Sucre lead to President Jamil Mahuad announcing on January 9, 2000 that the US dollar would be adopted as the national currency. Poor economic conditions and subsequent protests against the government resulted in the 2000 Ecuadorian coup d’état in which Jamil Mahuad was forced to resign and was replaced by his Vice President, Gustavo Noboa.

Throughout the 20th century, Ecuador was one of the poorer countries in Latin America, and had high rates of poverty and income inequality compared to other countries in the region. By the late 1990s around 45% of the population lived below the national poverty line, making them especially vulnerable. The discovery of oil in the 1960s lead to rapid economic growth, but created an economy that was dependent on exports of oil and agricultural products such as bananas, coffee, and shrimp. Lower oil prices resulted in economic stagnation throughout the 1980s and into the 1990s, as oil exports alone accounted for half of the countries total exports and about a third of all government revenue in the late 1990s. Ecuador’s population and economy can be geographically divided into three general regions: the Pacific coastal region in the west, the central Andean highlands, and the eastern Amazonian regions. 95% of the population lives on the coast or the central highlands, and accounts for the majority of Ecuador’s economic activity. The Amazonian regions are mostly populated by indigenous people who are generally poorer, despite the fact that the Amazon contains Ecuador’s significant oil reserves. Across all three regions, poverty is much worse in rural areas than in urban areas. Ecuador's social and economic inequalities have contributed to internal tensions and political divides on a national level, which became evident during the government's response to the financial crisis.

Economic conditions in Ecuador allowed the development of a weak financial system which was more vulnerable to disruptions. The financial sector was also affected by the regional fragmentation between policy makers in the capital, Quito, and banks based in the port city of Guayaquil, the most populous city and economic centre of the country. Financial liberalization policies had been adopted in the early 1990s, allowing easier access to international markets and investors, but they also created a largely deregulated domestic financial sector. Many Ecuadorean banks were well connected to prominent business groups and politicians, and financial supervision and regulation was not strongly enforced. As a result, Ecuadorean banks experienced a credit boom in the 1990s, providing high-risk loans to well-connected customers, assuming that the government and Central Bank would bail them out if needed. Lack of oversight also allowed many banks to engage in lucrative but risky offshore banking in U.S. dollar denominations, creating an informal dollarization of the financial sector, and a vulnerability to fluctuations in the exchange rate.

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