Lunes, 24 de octubre de 2016

| 2008/10/06 00:00

Who will pay for the broken dishes?

The crisis has hit Colombia. The failure of Lehman Brothers affected pension funds and even the central bank (Banco de la República). Expect new consequences.

Who will pay for the broken dishes?

If a few months ago someone believed that they were safe from the effects of the financial crisis in the United States, they have now surely changed their mind. Today Wall Street investors are just as nervous as common citizens from any part of the world.

In Colombia, the crisis has already had its first victims. Pension fund holders have lost $55,000 million COP ($23 million USD) due to investments in the bankrupt Lehman Brothers investment bank. Although it’s a small sum, it represents 0.1 percent of all savings in pension funds ($26 billion USD). A loss is still a loss.

We will have to wait for the liquidation of Lehman Brothers to know how much of this money can be saved. The president of Asofondos, the association of pension funds, Santiago Montenegro, appealed for calm and said that recovery rates between 20 and 30 percent could be expected once that entity is liquidated.

Even more incredible is that Banco de la República, known for its orthodox and rigorous management of Colombia’s international reserves, ended up affected by the failure of Lehman Brothers. They had a Lehman Brothers bond worth 2.7 million USD. Although it is small compared with the total of reserves of the country- it only represents 0.012 percent of the total portfolio- ultimately it demonstrates that even the most cautious analysts can be affected. The Banco de la República said that it is taking steps to recoup its investment.

But the aftereffects of the Wall Street debacle don’t end there. Former finance minister Juan Camilo Restrepo, who had to manage the financial crisis of the late 1990s , says that what is happening now is a strong credit restriction. In fact, international banks have already begun to reduce their credit lines. According to a survey by the Federal Reserve Bank of the United States, 60 percent of commercial banks have cut loan approvals.

The restriction on liquidity will have an impact on many. Last week it wasn’t easy for Colombian banks to obtain new foreign currency resources to finance their international clients. Wachovia Bank’s problems, in particular, will end up affecting Colombian institutions since many of them depended on Wachovia’s credit lines.

At the same time the lower availability of credit in capital markets will affect the government in its external financing needs. Although the government has the funds that it needs for this year, in 2009 it plans on tapping the capital market (via bonds) worth one billion USD. Obtaining this amount will not only be difficult, but also much more expensive. The Finance Minister Óscar Iván Zuluaga says that he has a contingency plan and announced that if the capital markets close completely, they will turn to multilateral banks to cover all the needs of the next year. From these banks - World Bank, IDB and the Andean Development Bank or CAF, - the government plans to obtain loans for 1.4 billion USD in 2009.

But perhaps the worst consequence for Colombia is that capital will not arrive as easily as it once had. Economist Daniel Castellanos, of the Universidad de los Andes, says that the appetite to invest in Colombia that had been skyrocketing will surely decrease. “People want much more safe assets and paradoxically continue to look towards United States treasury bonds.”

The hope that foreign investment will continue to drive the Colombian economy is gone. The forecast is not encouraging. In addition, many world economies will likely enter into recession. If the global economy collapses, exports of every country, including Colombia, will be affected.

The DANE statistics agency has just announced that unemployment in Colombia in August rose to 11.2 percent, more than it was during the same time last year (10.7 percent). There now have been two consecutive months of an increase of unemployment in Colombia.

The Ministry of Finance could be right when it says that the impact on the Colombian economy will be less than in other countries, but when it affects families’ wallets, that is of little consolation.

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