The Chilean government, seeking to bolster a national financial system stricken by recession and alleged mismanagement, has moved to liquidate three large financial institutions and intervened in five others, including the country's largest bank.
The action, announced last night by Economics Minister Rolf Luders, reflected severe financial difficulties for several of Chile's largest banking and industrial groups during the country's worst recession in half a century, government officials said.
Chile's financial difficulties followed larger-scale financial crises in Mexico and Brazil and neighboring Argentina. Mexico and Brazil required emergency loans last year from international banks to avoid default on their foreign debts. Chile also has serious balance-of-payments problems, and only last Monday the International Monetary Fund approved a $882.5 million financial aid package.
The government quickly sought to reassure foreign lenders. In a telephone interview, a spokesman for the central bank said that it would assure repayment of foreign loans owed by the troubled institutions, although it was not clear who would bear the cost of the repayment.
Later, however, Reuter reported that a central bank spokesman told reporters without elaboration that the Chilean government would not guarantee $3.8 billion owed abroad by the eight institutions.
The central bank sent a cable to major international banks today saying that the measure was a corrective step that "should do away with any reasonable doubt with respect to the stability of the Chilean financial market."
Despite the assurances, reaction to the move remained unclear both abroad and in Chilean financial circles, diplomats said in telephone interviews. Large foreign banks with a big stake in Chile's foreign debt of over $17 billion appeared to welcome the measure as a necessary means of resolving the banks' debts and limiting future overborrowing.
Some officials said there was concern, however, that smaller foreign banks might be frightened because the government was required to intervene. Although Chile's foreign debt is much smaller than that of the $80 billion owed by Mexico and Brazil, it is one of the largest in the world when measured in terms of Chile's 11 million population and its earnings from exports.
The failed institutions were the Banco Hipotecario, the Banco Unido de Fomento and the small CIGA finance company. Banco de Chile, the country's largest, was among the five banks placed under temporary government control to assure their stability.
Superintendent of Banks Boris Blanco said the five banks had too many loans concentrated in conglomerates that also depended on the insolvent banks and in some cases had loaned to "paper companies" that lacked earning capacity, The Associated Press reported from Santiago.
Luders said depositors and creditors of the insolvent institutions would be covered by a government guarantee for the first $3,400 owed them plus 70 percent of the remainder. The government ordered a bank holiday Friday, AP added.
In the last year Chile's economic problems have forced major devaluations of the peso, unemployment measured officially at almost 25 percent and a rate of business failures unequaled since the 1930s.
In a radio address last night, Luders said the most serious problem facing the Chilean economy was lack of confidence in the financial system "provoked abroad and at home by the volume of financial indebtedness and doubts about the solvency of the institutions that operate in the market."
Luders said the government intervention was carried out on the basis of a study that identified which banks were likely to become insolvent or were already bankrupt and those that needed preventive controls to halt the decline of their reserves.
He said the study showed that more than $1.5 billion in debts of companies or individuals in Chile were uncollectable. The figure represents 11 percent of total credit extended by Chilean commercial banks, he said.
The military government of Gen. Augusto Pinochet, while following strict monetarist, free-market economic policies, has allowed business groups to gain control of vast empires of factories, businesses and banks that sometimes engaged in extensive self-dealing of loans and other internal transactions, according to Chilean economists and foreign analysts.
The government action yesterday involved several of the largest banking and industrial groups in Chile. The most prominent was the Vial Group, which controlled the Banco Hipotecario as well as a large network of businesses.
The importance of the group is reflected by the fact that Luders, the economics minister who made the announcement, was himself employed as an economic adviser to the Banco Hipotecario until he was named to the Cabinet last August.
Government officials criticized banks for overborrowing and mismanagement, including questionable loans to firms associated with bank directors and owners.
Many loans were made in dollars borrowed abroad by the banks and loaned again at high internal interest rates. The combination of recession and devaluation of the Chilean peso made repayment impossible for many of the businesses, placing the banks themselves in jeopardy, government officials and diplomats said.
Government officials said the government would ensure the continued operation of the large industrial concerns affected by yesterday's action.
The cable issued by the central bank said that the bank's problems have "contributed to the maintenance of high internal interest rates with adverse affects on the productive sector," and that the government's intervention "is the last step required in order to establish the groundwork necessary for a steady and continuous recovery process."