A BRIGHTER SHADE OF GREY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP98-01394R000200010002-5
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 3
• Document Creation Date: December 27, 2016
• Document Release Date: July 30, 2013
• Sequence Number: 2
• Publication Date: March 1, 1988
• Content Type: OPEN SOURCE

Declassified and Approved For Release 2013/07/30: CIA-RDP98-01394R000200010002-5
LATIN AMERICA
eye to the practice.
The obvious alternative is credit cards,
but these are still in their infancy, except
for the retailers' own cards run by one or
two big stores.
Another retail banking service which is
just beginning to develop is automatic
telling. In late January, a group of banks
finally reached agreement to develop a
collective chain rather than each going it,
expensively, alone.
The $2.5 million initial investment, plus
a later $8 million will be borne by seven
banks, including the two biggest. Banco de
Chile and Banco de Santiago, and Citibank,
which will unite their existing individual
networks to form a chain of 142 cashpoints.
Among them this group manage 294,000
current accounts (of a total 522,000), and
151,000 of an existing 161,000 automatic
banking cards. They are aiming to bring the
total up to 300,000 cards and 200
cashpoints. A second group of seven banks,
including the Banco del Estado, Nacional
and O'Higgins, are planning a similar
network.
Banco Nacional, like the rest, has had a
look at the credit card business, but it is
holding off until it sees how the ATM
system develops. Echeverria said.
The bank's strength (its weakness, say its
critics) is its close relationship with the
business interests of its owner, Francisco
Javier Errazuriz. That relationship gave it
access to the expertise within the group in
investment banking areas, such as project
evaluation, or in insurance, or foreign
trade, said Echeverria. "We can offer a
pool of services, and we assess the overall
profitability of the client rather than an
individual operation."
The bank's indentification of interests
with a single client closes the doors firmly
with Errazuriz's competitors. Since he is
active in the growing fruit and forestry
industries, as well as in insurance and
supermarkets, that cuts it off from a
considerable range of alternative business.
In practice, a staggering 226% of its capital
and reserves is committed to related
companies.
Banco de Credito e Inversiones, too, has
gone for retail banking, with a separate
"personal banking" department. It has a big
national network with 89 branches (though
Banco del Estado has 190, Banco de Chile,
140). That gives it cover from northern
Iquique (where Chile's duty free zone, and
the banks there capture a slice of the profits
of the drugs traders in neighbouring Peru
and Bolivia) right down to the AntarCtie
(where the solitary bank clerk can find
himself sleeping in the bank when the
weather is really bad).
The big branch network has allowed the
bank to expand its client base, for example
anion2 iraciition;i1 i'arliters, who have seen
their business recover since the government
adopted more protectionist policies in
10:ikulture four years ago.
"You can tell the banks are busy
banking," said a foreign banker, "look how
little they appear in the press these days. a
year or so ago they spent their time
lobbying publicly against changes in the
laws. Now they've decided to live with
them, and there's a lot less bitching and a lot
more business."
That is not to say that the criticisms have
stopped. At Banco Nacional, Echeverria
said: "The superintendency has enormous
discretional powers. He can make or break
companies, virtually, by -the credit
classification he gives them."
The category, from A to E. obliges the
bank to make higher provisions the lower
the classification of the potential borrower,
and can make lending to a risky company
just too expensive.
"Now, the superintendency team is made
up of reasonable people," said Echeverria.
"But if there is a change of government, the
new regime will have a powerful weapon in
its hand through which it can control a large
slice of the economy."
IGHTER S
G EY
I=1
DE
Bankers and brokers in Mexico City reacted with dismay to the Economic
Solidarity Pact. "The financial system has been hobbled," said one.
The pressures and
constraints on Mexico's
bankers and their customers
? together with the constant
movement of goalposts by
the government ? has
encouraged a grey market
financial system to flourish
as customers adapt to the
rules of a game which
change weekly and
sometimes daily.
By Douglas Bartholomew.
t's no secret that times have been
tough in Mexico in recent years.
And for Mexican bankers, things
got still tougher in January and
February. Already short of capital to lend
because of the central bank's near-insatiable
appetite for reserves, the banks were
required to further tighten their credit belts.
The government's new anti-inflation
accord, the Economic Solidarity Pact
signed last December 15 by business,
labour, and campesino (peasant) groups,
required the country's commercial banks to
cut loans outstanding by 10% in January
and 5% more in February. "The Mexican
financial system has been hobbled," said a
stockbroker in Mexico City.
The Pact is not the only problem bankers
face. Last year's change in the corporate tax
law eliminated interest deductions except
Etiromonev March 1988 131
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LATIN AMERICA
for interest costs less inflation. So the plain
vanilla term loan from bank to corporate
borrower went the way of the $40 barrel of
crude.
It is because of these pressures and?
constraints on bankers and their customers
that a grey market financial system has
sprung up in Mexico, as companies adapt to
the new rules of a game which change
weekly and sometimes daily. The means of
this unregulated market are often creative
seven-day money, 180% annualised returns
on 30-day paper, and short-term peso loans
arranged without aid of bank or broker.
Bankers are not active in this market.
except as backstops to informal financing
arrangements?for instance, they will
guarantee a company's commercial paper.
This informal financing network among
the Mexican blue chips bypasses even the
country's securities market?the extra
borsatil ?thus avoiding the 15% value-
added tax companies must pay for this type
of financing.
"There is a clear incentive for this
parallel market," said one foreign banker.
"The cost of funds is reduced for the
borrower and enhanced for the investor.
And it is all done outside the banking
system. There is no legal reserve
requirement for these funds."
Grey market lending poses a special
problem for the Mexican central bank?the
Banco de Mexico. Through a variety of
measures, it has continually sought to exert
closer control over the country's scarce and
nervous capital. Since it owns the banks, it
can easily control the flow of funds through
the banking system.
But the central bank's monetary policy
has failed to hold sway over most of the
country's private wealth, much of it in the
hands of large corporations. "The monetary
policy of the government is very limited in
scope," said Jaime Castillo, a director at IFI
de Mexico, an investment banking house
affiliated to Lazard Freres. He estimated
that Mexico's largest companies control
30% of all funds in the country's money
markets. These funds :,re flighty, have a
Awn fuse, and know no national
boundaries.
"Companies are not taking any bank
loans these days, mostl? because there is no
money around in the financial system for
them to borrow," Castillo added. "Debt is
,xtremely expensive, and the tax
advantages are not as attractive as they once
were." The net effect, he said, is this: "If a
treasurer or chief financial officer needs
P1.500 million [$750.000] now, he can get
it the next day by making a telephone call
zo another treasurer. Why should he wait a
week for a bank to process his loan?"
Mexican interest tales are so
nigh ? 30-day government cetes, or
treasury certificates. pa :53% in early
February, while commercial paper on the
'extra-borsatil or unli .co market was
'commanding rates up to 185% that many
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Bancomer's Lyon: "Our commercia
lending, as well as that of the other
banks, has been severely restricted."
cash rich firms have taken to playing on the
money markets. "The big companies can go
from pesos to dollars, or dollars back to
pesos. like that," said Castillo, snapping his
fingers.
This golondrino capistrano, or money
that migrates (the term derives from the
swallows that migrate north and south each
year to and from San Juan Capistrano in the
US) flows both ways across the border very
swiftly. Castillo said. But according to one
foreign banker, last autumn's flow of funds
out of Mexico was not a saca do/ares, or
true flight of capital. Most sources,
including the government, agree that the
net outflow during and after the stock
market crash of October?November
(Mexico's borsa lost 75% of its value in five
weeks) was reversed by a net inflow of
dollars to pesos in January.
Castillo saw the latter trend continuing in
February due to the high returns offered on
the Mexican money markets. "This money
doesn't mean there is a permanent inflow,"
he said. "In March, it could go back out
again."
"Companies with cash can employ it very
profitably in this market, one foreign
banker added. "The bulk of this peripatetic
capital belongs to the corporate treasuries
of large triple-A rated firms.
So, lending and borrowing terms are
getting shorter than the hairs on an iguana's
back. "When you have interest rates as high
as we've had them, investment terms
shorten." said Guillermo Guetnez, execu-
tive vice-president at Banamex, which in
mid-January introduced a new seven-day
deposit certificate. "It is a young product,
so we have no figures available yet. "But it
has been very popular."
Bancomer, which is offering a similar
"seven-day promissory note," viewed the
short-term deposit instruments as a magnet
to regain some of the funds that slipped
away in recent years to the casas de bolsa,
or brokerage houses. "Over the last eight
years, the brokerage houses have increased
their share of the nonstock savings in
Mexico from 4% to 30% reported Tim
Heyman executive vice-president at
Estrategi Borsatil, a Mexico City securities
house. "The Mexican banking system
doesn't fear competition? we like it,"
Guemez added gamely.
Admittedly, the belt-tightening the banks
were forced to undertake on the asset side
of their balance sheets wasn't accomplished
without some pain. . "Our commercial
lending, as well as that of the other banks,
has been severely restricted,"said Robert
Lyon, executive vice-president of Ban-
comer's international gmup.
The 15% trimming of the bank's portfolio
of commercial and consumer outstandings
of P5 trillion translated into a cutback of
P750 billion. "The restrictions limit our
ability to lend, but we assume they will be
lifted in the near future," Lyon added.
Clients approaching the bank for credit
are not turned away immediately, he said.
"We try to meet their needs through one of
the areas of lending that are exempted, such
as exports, if at all possible. But just
because we are under some temporary
restrictions, I don't think our clients are
going to suddenly stop doing business with
us."
Guemez of Banamex said the calling in of
loans and limits on issuing new loans were
difficult measures, but added that the
moves had caused to bank to look for
business elsewhere. "Banks are becoming
more efficient and creative in Mexico. The
reduction in credit by the Bank of Mexico
and the resulting squeeze on liquidity
means that we are looking more closely to
lend to clients for their export/import
business, and for businesses such as
housing. But it is always difficult to cut
back on loans."
One significant piece of business to come
the bankers' way in 1988 is the handling of
investment banking for the government's
stepped-up privatisations programme. On
the block for divestment by the state will be
scores of companies, among them
Telefonos de Mexico; Cananea, a copper
mining firm with a heavy debt burden; a
sugar mill; Dina, the ailing truck, bus, and
engine maker; and Mexicana, the national
airline. Just as debt-equity swaps and the
stock market were the hot tickets last year,
the byword in 1988 will be privatisation.
Castillo predicted.
Some, the parastatals. are no prizes.
Cananea. for instance. has nearly $800
million of debt. Mexicana desperately
needs an infusion of cash to buy some new
jets so it can stay in the air. Dina is in
terrible shape, according to a senior
accountant in Mexico City.
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LATIN AMERICA
:?(.1-78.1111'461
? A further negative for buyers of the
privatised firms is the prospect?of dealing
with Mexico's militant unions. Efforts to
? prune waste and eliminate.unnecessary or
redundant positions would no doubt kindle
fierce opposition among Mexican-unions.
None. the less; IFI de Mexico's Castillo
thinks many of the parastatals to be sold
? will draw plenty Of investor interest-. "These
are not all bad companies. There are some
good ones and some had ones.:"
Cananea is a case in point. "There are 20
. . . just because we are under
some temporary restrictions, I
don't think our clients are
going to suddenly stop doing
? business with us.
. Robe,, Lyon, Bancomo
parties that have expressed .interest in the
.-.company," Castillo said. They include
industrial copper users, other mining firms, ?
and companies looking for Investment
opportunities. "The government wants the
best price, but it wants to be careful about
who it Sells to. It doesn't want a monopoly
situation,. yet it wants a buyer who has
some expertise, at least in a:related field."
'Castillo believes the government could
raise between $1 billion and $2 billion this
year through the . sales of parastatals,
depending on how many go on the block.
Bidders are likely to include both Mexican
and foreign companies, as well as some
private investors. The latest rumour is that
Japan Airlines will bid for Mexicana.' .
The government has brought down the
auction gavel three times already on scores
of lesser enterprises, including some petro-
chemical firms, its -interest in Renault, a
cement maker, and the national soccer
team. Other parastatals Sold last year were
Accioniones Bursatiles Somex, .? the
brokerage unit Banco Somex and the El
Presidente hotel chain. ?
Castillo, for one, believes the privatisa-
tions could boost the economy. "The
government must give large subsidies to
many' of these companies, because Of their
huge debts and losses. If 'they can get out
from under this, it will be an important
step. The capital can .be used to pay back
foreign debt or to reduce the need for new
debt. If the privatisations are.successful, you
could have a. leaner state by the end of the
year.
Although no one confuses last year's sale
?b1.34% of the Mexican banks to the public
with privatisation Castillo thinks they could
be next in line in a year or two. It will not
happen with this ;idministration." he Said.
?"Mayhe next year.- .
5.4,447.00?tyrkiifii;e'vr..E1ign-,740.4gtilt'10K-nr-M ,140.)",41(41'.7.V.ri-Vt17,Mir
Banco Venezolano de Credito's Caracas HO: though not one of the "Big
Banks", it outstrips most others in terms of profitability and productivity.
Venezuelan commercial
banking is modernising,
becoming better managed
and more competitive within
the stricter limits imposed by
the government. But negative
interest rates and tight
liquidity are hurting the
banks. Some critics warn
that an orderly restructuring
process must be made. And
service to customers should
be updated. By Joseph Mann
enezuela's commercial banking
system is in far better shape today
than it was five years ago.
Commercial. banks, which make
up the most important segment of
Venezuela's financial system, successfully
weathered a huge capital on ((low in 1982,
a major devaluation of the Venezuelan
holivar in 1983 (plus subsequent
devaluations), and learned .10 :cope with a
seven-year recession that lasted through
1985. .? ?
"The coininercial system is more solid
today," said 'Jose Maria Nogueroles;
.executive . vice:president and .general
manager of Banco Provincial, the country's
largest Commercial bank. "Banks have been
able to manage a variety of problems."
. Venezuela's economy 'improved in
1986-87, and the banking system's health
also recovered thanks to a series of
government-imposed takeovers, mergers
and liquidations. TO cope with problems
that developed over the last several years,
commercial banks increased capital, set
aside-, large reserves for had loans.
restructured their foreign debts and adopted
'stricter norms for granting new commercial
credits. .BarikS also have changed., to .keep
pace with new ? business. "Commercial
banks . in ? Venezuela have. .become
modernised: and .are now much more.
competitive," said Oscar Garcia Mendoza,
president of Banco Venezolano de Credito.,
"This can be seen in some of the new
services they offer: guaranteed payment of
cheques, payments and balance statements
made by . telephone. 'automatic teller
machines and the enormous efforts made to,
finance the country's imports," he said.
"Venezuela is one of the leading
countries in Latin America with the
capacity to offer modern banking services.".
Noguerolcs said.
While private banks built up reserves tr.
loan losses, the government was also
obliged to swallow huge losses, Especially
Euromoney March 1988 137
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