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Good and happy Monday! What week we finish and what week is next. For those who do not understand the current crisis well, it is important to understand that the economy works with credits and loans. If that activity slows or stops, there is a ripple effect for the entire economy, particularly for small and medium-sized enterprises, which are forced to cut spending and tighten their belts.
The banking crisis has already swept away three U.S. banks in two weeks and forced the end of Credit Suisse after 167 years, now part of its Swiss neighbor UBS. The spotlight is now on German giant Deutsche Bank, though analysts say it makes no sense and the bank is sound.
“There were a couple of tweets and then this fell apart much faster than it has happened in all of history.”
Jane Fraser, CEO of Citigroup, said it to explain the role of social networks, mobile applications and fast money transfers, in causing bank runs like the one that condemned Silicon Valley Bank, triggered a global bank run and has markets around the world on tenterhooks.
What is the big problem: the rise in rates in recent months by the main central banks, including Chile, to try to control inflation. The phenomenon caught many banks ill-prepared and with assets on their balance sheets totally unshoveled. That is, they had instruments at low rates in their portfolio, whose value has been falling as rates rise. That makes them more vulnerable and has the global financial system on tenterhooks.
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1- THE GLOBAL BANKING CRISIS SPLASHES THE CENTRAL BANK
The origin of the banking crisis and its impact on Chile. The main reason for the banking crisis that started with the run of Silicon Valley Bank in the United States was how unprepared the bank was (not the only one) to react to the aggressive rate hike of the Federal Reserve (central bank of the United States), which aims to combat the highest inflation in 43 years.
The bank had a mismatch of terms and rates between financial investments in US Treasury instruments (debt/bonds) and customer deposits. And these investments were accounted for as “Held to Maturity” (HTM), so that the market variations of these instruments are recorded in equity and not in profit, and with the impossibility of hedging rates. So explains Javier Vergara, founding partner of Valtin Capital, an influential local financial boutique.
In order for an investment to be classified as an HTM, the bank must have the intention and ability to hold that investment to maturity.
Well, that same problem is one of the factors behind the Central Bank’s reserve losses in 2022. One part is for the dollars it sold to prop up the peso, but another is for its own portfolio investments.
From the third quarter of 2021 to December 2022, net reserves fell by a third, from $18.6 billion to $12.8 billion. If you look at the graph I publish with this note, you can see how the bank’s portfolio loses silver as interest rates began to rise in the world. As of December 2022, the portfolio accumulated losses of US$ 1.6 billion.
From the issuing entity explain that the reduction of the International Reserves of the Central Bank, occurred during 2022, is explained by several factors. “Half of this decrease is explained by the foreign exchange intervention program carried out between the second half of July and September 2022.”
But the other half, the bank acknowledges, is due in significant part to the lower market value of the fixed-income instruments in which international reserves are invested, due to the increase observed in interest rates at the global level and the appreciation of the dollar. But they clarify that “these movements in fixed income are cyclical and, in periods of falling interest rates, it is expected to observe an increase in the value of international reserves, as has happened in previous years.”
They also point to reserves falling due to lower balances held atThe Central Bank’s current flows from banking companies, whose movements depend on decisions of these institutions and Special Drawing Rights operations with international organizations.
It is worth mentioning that this week the US bank Wells Fargo warned that the Chilean peso is “very vulnerable”. And he adds that Chile is exposed to an eventual financial crisis in the categories of current account balance, foreign currency reserves and political risk.
There are analysts who also point to the BCI as vulnerable for the same reasons that the Central Bank registered a fall in its reserves. Valtin’s Vergara says the Yaur bank is the main institution holding investments to maturity, with a loss in market value of $550 million reflected in equity (not profit) and equivalent to over 9% of total equity.
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2- THE AUSTRALIS SOAP OPERA
What happened?. This week the Chinese giant Joyvio came out with the tip plugs against one of the most controversial Chilean businessmen: Isidoro Quiroga. In 2019, Joyvio paid US$ 921 million for the salmon company Australis de Quiroga. Now he hired the controversial lawyer Alberto Eguiguren, Sebastián Oddo -historical advisor and lawyer of Julio Ponce and SQM- and Gabriel Zaliasnik and Jorge Bofill. They accuse Quiroga of hiding key information and now they want the money back and undo the purchase. They ask for US $ 1,220 million as compensation.
“The evidence around this case is overwhelming,” says the current administration of Australis and this Sunday, in El Mercurio, the general manager, Andrés Lyon, claimed to have more than 100 emails with hard evidence. .
Quiroga’s society, which lives in London, assures that “these are false accusations, totally implausible and opportunistic.” To defend himself, Quiroga hired Cristóbal Eyzaguirre, one of the main partners of Claro & Cia. It was that studio that advised him when he sold the company.
What is the heart of the matter. Overproduction of salmon. The Chinese group denounced itself before the Superintendence of the Environment (SMA), regarding that for 8 years they produced much more than they admitted and what was allowed by their quotas / permits and in protected areas.
They allege that information was withheld from them in the due diligence of the purchase through “a policy designed by the company’s previous management to hide overproduction, a policy that was also used to deceive the authorities,” Australis said yesterday. And they accuse Quiroga and 7 executives of hiding the figures during the negotiations. They say the company was worth half of what they paid. They have already gone to the Mediation and Arbitration Center, and this week they promise lawsuits.
“We hope that the business world understands the enormous damage that this fraud generates to the public faith and the international image of Chile. The evidence surrounding this case is overwhelming,” the statement said.
In the sale of Australis, the Chinese group was represented by the lawyers of Cariola Díez Pérez-Cotapos. LarrainVial was the investment bank that made the operation. In Sanhattan, Quiroga’s personal friendship with León Vial, one of the founding partners of LarrainVial and sanctioned for his role in the Cascades case, is well known. In the industry, they say that key is to know if buyers consulted environmental experts who knew the salmon industry as part of the due diligence. “This is not accounting or financial makeup,” he explains.
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3- SMU, SAIEH’S LIFELINE
What happened?. This week SMU shares touched $150, their highest level in 3 years and a price that approaches the one at which the controller, Alvaro Saieh, can begin to release certain garments. In the last two months, Consorcio, BTG and the rest of the banks that have SMU shares in collateral for the debts accumulated by the businessman, have begun to sell packages and that generated all kinds of speculation about whether Saieh would lose control of the supermarket chain. It owes BTG about $18 billion alone.
If the stock tops $155 and touches $160, “Saieh is already above the water and can start releasing certain garments,” says a banker who was part of the negotiations with the businessman. The trading was made with shares at $75.
Sources familiar with details of the deals with the banks claim that 100% of Saieh’s shares in SMU are pledged. And that the pact was that, if the price of these touched $ 125, the banks could just start selling the shares as collateral to pay the debts. There are caps on how much they could sell as prices went up. Banks could sell up to $10 billion ($12 million) and always have to notify Saieh, who has 48 hours to buy them. Some credits mYou are guaranteed to others.
Saieh does not sell. Although it no longer has 50%, with 47.5% still controlling, it still dominates the board and is the boss in the company. Andrés Winter, general manager of CorpGroup, categorically pointed out “that the current controllers of SMU will maintain control of the company, since the past sales of shares in guarantee or those that may eventually occur in the future, do not alter or will alter this condition.”
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4- GRAPH OF THE WEEK: ACCESS AND COST OF WATER
Chile has the best water quality in the region and the highest percentage of the population with access to drinking water and sewers. In Latin America and the Caribbean, 161 million people still live without access to safe drinking water and 431 million lack access to sanitation/sewerage.
According to ECLAC, the average bill for this consumption in the region would amount to 28 dollars per month with a cost per cubic meter of 1.65 dollars. 83% of customers would be measured, and the coverage ratios of operating costs show 132%, if depreciations are incorporated into the denominator 111% and, if interest is added, it reaches 108%.
This graph shows that our country is the only one that the health authorities of the United States classify among those that water can be taken from the tap. There is consensus among experts that, the greater the cost coverage by the system of subsidies or regulated tariffs, the greater the percentage of the population served.
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A message from the AFP Association
For more information click on the image
The AFPs manage more than 12,000,000 pension accounts and carry out over 118,000,000 face-to-face, digital and telephone visits annually.
In addition, the administrators deliver state benefits, complying with the deadlines and terms established by law.
Full information can be found at this link or by clicking on the image.
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5- THE WEEK IN NETWORKS: LÓPEZ AND JILES UNIDOS
This tweet by Ramón Lopez, the PC economist and academic at the Faculty of Economics and Business (FEN) of the University of Chile, generated all kinds of reactions in networks. A movement was even created among former students of the FEN to condemn the now open support of the former adviser of the presidential candidacy of Daniel Jadue to the controversial Pamela Jiles and his obsession with a sixth withdrawal of the AFP and price controls.
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6- NO HEELS OR TIES
The emergence of ChatGPT and other AI tools has some of the world’s most influential thinkers debating whether the phenomenon is bigger than the invention of the printing press or the splitting of the atom.
Bill Gates, the founder of Microsoft, says that artificial intelligence, and the sudden proliferation of chatbots, “is as revolutionary as mobile phones and the Internet.” Axios, the influential digital content platform in the United States, published a report in which many experts warn that the phenomenon is so great that it represents an existential risk for humanity and it is urgent to “go slowly and regularly”.
Influential New York Times columnist Tom Friedman wrote this week that we are entering “one of those moments in history when certain new tools, ways of thinking or sources of energy are introduced that represent a great departure and advance from what existed before … You have to change everything (…) how you create, how you compete, how you collaborate, how you work, how you learn, how you govern and, yes, how you cheat, commit crimes and fight wars.”
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– Regarding the debate on pensions in France and the reform discussions in Chile. What is happening in France is a conversation that the whole West is having. President Emmanuel Macron’s proposal to raise the retirement age from 62 to 64 and unify the systems is a response to a problem we all have: we are living many more years and saving little and there is no system that can finance it.
The World Health Organization (WHO) predicts that the world’s population over the age of 60 will double by 2050. And the influential consulting firm Group of 30 expects the pension deficit to be equivalent to 23% of global GDP for that year, according to Bloomberg. In Chile, any reform must start by recognizing that more contributions must be made and at least the retirement ages between men and women equalized.
– The chills generated in the market by the problems of the stockbroker STF Capital. This Friday the Commission for the Financial Market (CMF) suspended its activities for the non-cumpCompliance with the legal and regulatory requirements required for the submission of audited financial statements, as well as requirements related to equity coverage indicators.
The brokerage quickly came out to calm the market and give security to its clients and announced a capital injection of US $ 5 million. STF Capital Corredores de Bolsa is linked to the Sauer family, Sebastián Somerville, Luis Flores and Rodrigo Topelberg Kleinkopf (grandson of the businessman who had representation of Scania in Chile). It was created in the middle of the pandemic and they are considered aggressive when it comes to attracting customers. Most of the capital increase will be provided by Somerville – son of the former president of the Association of Banks, Hernán Somerville – and Topelberg.
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Chile remains the region’s orderly student. This week, Moody’s, the powerful rating agency, cut Bolivia’s credit rating to minus B, and Fitch said Argentina is on track for a new default. That, less than two weeks after Morgan Stanley said it is time to bet on Chilean stocks again, due to the reduction of macroeconomic risks thanks to the moderation of changes in tax and pension matters, giving support to the decision of the Government of Gabriel Boric to contain spending, Maintain macro balances and have the accounts orderly.
Moody’s says the decision to cut Bolivia’s rating is due to the sharp drop in international reserves. It explains that the decision reflects the assessment of its analysts that a number of factors related to very weak governance have contributed to decreasing the availability of hard currency and increased external liquidity pressures to a point that threatens macroeconomic stability. “The fall in liquid international reserves has precipitated a confidence shock that has undermined macrofinancial stability. Without swift and meaningful action to reverse the situation and restore stability, the sovereign’s ability to repay its debt is at risk.”
“Default is imminent” for Argentina, Fitch Ratings warned on Friday. This follows the decision of the Ministry of Economy to pesify the debt in dollars of public bodies, including state pension funds that nationalized the second government of Cristina Kirchner in 2008. The country risk exceeded the barrier of 2500 basis points.
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7- AGENDA OF THE WEEK: QUIET
– Marcel, Velasco, Larraín Matte, Perez Mackenna and Esteves. These are the surnames of the protagonists of the LATAM FOCUS 2023 seminar organized by BTG Pactual Chile this Tuesday at the W Hotel and it is anticipated that it will be a turned board. It will be one of the finance minister’s last chances to speak to the market ahead of April’s IPoM and March’s inflation data.
There is also a lot of interest in what André Esteves, president of BTG Pactual, can say about the current banking crisis and its possible impact on Chile and the region. So does Andrés Velasco, former Minister of Finance of Bachelet I and current dean of the Faculty of Public Policy at the London School of Economics, who will address the economic environment and growth projections for Chile.
Matte Group and Luksic Group. It is one of the few occasions when the leaders of the two largest economic groups meet in public. Bernardo Larraín is vice president of Colbún and CMPC, and Francisco Pérez Mackenna is the general manager of Quiñenco.
– DATA AND STATISTICS.
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8- LAST WEEK!
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