One Country Managed to Default on $3.9 Billion in Bonds

By Sean Hyman, Currency Analyst

If you want to talk about cautionary tales, you have to start in Ecuador.

Currently Ecuador uses the U.S. dollar for their currency. But even with the dollar’s strength in the second half of 2008, Ecuador is still facing major economic problems (kind of like the U.S.).

Ecuador just defaulted on US$3.9 billion of international bonds. Not only is this bad for all of their international creditors but it also may cut off their access to U.S. dollars. If they can’t secure U.S. dollars to buy what they need, then they are going to have troubles providing credit to their economy.

This means they may have no choice but to abandon using dollars altogether. If so, it’s going to get much worse for Ecuador before it gets better.

Not to mention, oil is one of Ecuador’s main store of wealth. Even now, their oil revenues are drying up as the price hovers around US$38 a barrel. The problem? They need US$95 a barrel oil to cover their budget! Oops! A bit of a miscalculation there on their part I’d say.

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