Government as safeguard of financial sector is a repeated history, since 1977 there have been 4 main crisis in the region (Latin America), the first one was in 1981, then 1991, 1999 and finally 2008, most of them were due to credit defaults. Since the big crisis at the end of 20’s, governments give huge resources to financial sector in order to avoid worst scenarios but at the end unemployment is high and bank’s owners are in the same lucrative strategy, they take society contributions (taxes) to afford their losses. This note shows how private banks take advantage of financial crisis through higher credits after meltdown in Colombia, they work as following: first default credit comes due to high interest rates and inappropriate debt management, then governments (central banks) give solvency though huge money packages afforded through taxes and low lending rates through central banks (rates close to zero) but financial institutions charge higher primes to consumer and medium size firms, then interest rate goes up again and crisis come again, finally unemployment is high through whole path. The main conclusion is: what is Basel III doing to avoid this perverse cycle?, does this institution take into account the global unemployment disease in her accounts?, my impression is it does not. Moreover, Colombia Balance of Payments Crisis is probably coming at the end of the next seven years.
Author: Humberto Bernal,
Economist,
e-mail: zhumber@gmail.com
Twitter: @Humberto_Bernal
It can be download @ PDF
The last financial crisis as many others brought high private external debt in Colombia as figure 1 shows, after 1981 private no financial institution increased their external debt, same situations were in 1991, 1999 and 2008. This last crisis brought an exponential increase in this type of credit. Before 2008 crisis, private credit showed an average annual growth rate of 5.7% and after 2008 crisis this average was 13.1%, then local firms took advantages to improve their infrastructure and capital due to “low interest rates” but financial sector model could stop this productive process again. Figure 2 shows the external interest rates moving, for instance LIBOR rate (red line) showed a decline after each crisis, then after couple of years this rate increases to face the following crisis.
Figure 1. Medium and long term external private debt for no financial institutions in Colombia 1970 - 2012
(US$million)
Source: Central Bank Colombia.
Figure 2. Interest rate charge to private debt and LIBOR* rate
(%)
*LIBOR 6 months.
Source: Central Bank Colombia.
One tends to think that local firms can take external debt at LIBOR rate but it is not the case, Local firms are charged with a prime (Interest rate charged menus LIBOR rate) of 3.23% in 2012, if one calculates this prime since 1995, one concludes that local firms are facing a higher prime as years go, it went from 0.65% in 1995 to 3.23% in 2012. Therefore one can conclude that external financial sector is affording her losses through central banks low interest rates and high lending rates, although these lending rates face a low value compared with interest rates before crisis. This problem is not abroad only, local banks in Colombia are charging high interest rates while Colombia Central Bank decreases her reference lending rate, it is 3.25% in 2013 and lending rate is about 11.94% in 2013!!!.
The volume of private no financial external credit in Colombia is about US$18.1 million in 2012 that means 4.9% of her GDP in 2012 as figure 3 shows. Although this external credit shows a lower share in GDP, the issue is that Colombia exports depends on mineral commodities and she exports low volume of added value goods, then after 7 years when crude oil finishes, Colombia could face a Balance of Payment Crisis.
Figure 3. Medium and long term external private debt for no financial institutions in Colombia
1970 - 2012
(Share of GDP %)
Source: Central Bank Colombia.
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