Last week we commented here on the curious phenomenon that several presidential candidates see the International Reserve (IR) as some kind of ownerless piñata that they propose to put their hands on to “reactivate the economy”. This is interesting because one of the consequences of financing public spending with IR would be exactly the opposite.

Let’s see. Since we became dollarized, there has been no lender of last resort and, therefore, banks have been self-imposed a level of bank reserves well above that required by law as a reserve requirement. That is, between a quarter and a little more than a third of the deposit, instead of only 2 to 5% as required by law at different times and in different cases. The high percentage of self-calculated reserves is one of the causes of relatively high interest rates in the country.

Piñata without an owner?

It’s understandable that banks hedge in this way, given that there is no lender of last resort — the Central Bank of Ecuador (BCE) cannot print dollars against the series — and that the financial system is not integrated with the rest of the world. . In the case of Panama, for example, the parent companies of international banks present in that country act as lenders of last resort.

Contrary to what some candidates and other opinion leaders think, it is not idle or government money.

The disposal of IK, which contains a large part of bank reserves, does not stimulate the economy, but, on the contrary, limits the supply of loans and raises interest rates. When it is clear to everyone that bank reserves are not available because the ECB has lent them to the central government to finance public spending, banks notice this effective fall in their reserves and slow down credit expansion, thus limiting output and employment growth. .

Why is it not a good idea or feasible to bring in $4.5 billion from international reserves as the politician suggests?

Additionally, as this gap created in the reserves concentrated in the ECB is obvious to everyone, the stability of the financial system is threatened, but not dollarization. If this secret financing mechanism is misused, economic entities can realize at any moment that there are not enough reserves to meet liquidity requirements, and at that moment a flight would be launched that could destroy even the most solid banks. This irresponsible risk was taken by the government of Rafael Correa when up to three quarters of the IR was spent. As of 2017, this gap has been filled to reach a coverage level of 69%.

Contrary to what a few presidential candidates and other public opinion experts tend to think, it is not empty or government money. These are funds that are mostly owned by depositors in the financial system. This money serves to ensure the liquidity of the financial system and its ability to lend.

Proposing the reactivation of the economy by depriving the financial system of liquidity would have the opposite result as expected. Of course, some may think that a dollar of public spending brings more than a dollar in the private sector, but we already know that the former is always difficult. This is because it has no real incentives and does not respect the price system. (OR)