| This, of course, is a political decision. There is no | | | | credit crunch ensued and business bankruptcies |
| "right" thing to do. Even the IMF imperatives are | | | | proliferated. Venezuela entered one of the worst |
| not sacred. Sometimes, inflationary goals should | | | | economic periods in its history with rampant |
| be sacrifice to avoid the total collapse of the | | | | unemployment and a virtual state of economic |
| banking system and, with it, the economy as a | | | | depression. It cost the country 12 billion USD to |
| whole.Unfortunately, a lot of experience has been | | | | extract its banking system from the throes of |
| accumulated elsewhere in the world. No country | | | | imminent evaporation - an amount equal to 22% |
| was exempt, all suffered collapsing or | | | | of its annual GDP.And this was nothing compared |
| near-collapsing banking systems. India had to | | | | to the Brazilian predicament. Brazil is divided to |
| nationalize the fourteen biggest banks - and, later | | | | geographically huge states, each with its own |
| on, tens of private, smaller ones - in 1969.This | | | | development bank. These banks are really |
| was done to avert a major financial catastrophe. | | | | commercial banks. They have hundreds of |
| No one can enumerate all the banking crises in | | | | branches spread across the states, they take |
| England. As late as 1991 it had a 10 billion USD | | | | deposits and make loans to business firms and to |
| collapse (the BCCI bank).In 1973-4, during the | | | | individuals. But their main debtors are the |
| "secondary banking crisis", the government had to | | | | administrations of the states. When Banespa, the |
| launch operation "Lifeboat" to save 60 banks. | | | | Sao Paolo state development bank collapsed, it |
| They failed because the Bank of England | | | | was owed 19 billion USD by the state |
| deregulated the credit markets and freed it to | | | | government, not to mention other bad loans. This |
| competition.As we review this scorched earth of | | | | bank had 1,500 branches and millions of |
| ruined banks, six patterns emerge concerning the | | | | depositors. It would have been political suicide to |
| compensation offered by the state to the | | | | just let it die away. In December 1994, the |
| adversely affected clients.The USA established a | | | | Central Bank took over the day to day |
| Federal Deposit Insurance Corporation (FDIC) as | | | | management of the bank and installed its own |
| early as 1933.Every depositor in every American | | | | people in it. The bank was later completely |
| bank is insured and the participation of the banks | | | | nationalized. Moreover, the other state |
| in the FDIC is obligatory. The FDIC covers | | | | development banks began to wobble, together |
| deposits of up to 100,000 USD per person per | | | | with a sizeable chunk of the private banking |
| bank.The savings and loans associations (SLAs) | | | | sector - 27 banks in total. This was really ominous |
| were insured in a separate agency, the | | | | and the government came up with a creative |
| FSLIC.When a wave of bankruptcies engulfed the | | | | solution: instead of saving the banks - it saved the |
| SLAs in 1985-7, the FSLIC went bust and was | | | | big clients of the banks. Sao Paolo received 66 |
| unable to meet the demands of the panicky | | | | billion USD in federal credits which assisted it in |
| depositors.The USA reorganized the whole | | | | re-financing and in re-scheduling its debts, |
| system but it also decided to compensate the | | | | especially its debts towards Banespa. The bank |
| depositors and savers in the SLAs. To do that, it | | | | was saved, the state was saved, the federal |
| initially injected - using budget contingency funds - | | | | budget was 66 billions poorer - and this was only |
| 10.8 billion USD. Then, a special agency was set up | | | | the beginning. In certain cases, the loan (asset) |
| (the RTC). This agency established RefCorp, a | | | | portfolios were so bad and unrecoverable that the |
| corporation whose sole purpose was to issue | | | | government had to inject money to the bank |
| bonds to the public and sell them in the various | | | | itself - because there were no more clients to |
| stock exchanges throughout the USA. The | | | | inject money to. Banco do Brazil received 7.8 |
| proceeds of the of the sale were used to beef | | | | billion USD on condition that it writes off loans |
| up the failing SLAs and to make their balance | | | | from its books. Another 13.6 billion USD were |
| sheets much healthier.It is important to note that | | | | given to private banks. The government also |
| nothing explicit was promised to the depositors. | | | | cajoled banks into merging or into finding foreign |
| The government made vague and late | | | | partners. The depositors were completely |
| statements about its willingness to support the | | | | compensated but only a few of the 27 saved |
| ailing institutions. This was enough to calm the | | | | banks are of any interest to foreign investors. |
| panic and to re-establish trust between the | | | | After all, a bank without assets is hardly a bank |
| depositors and the SLAs.RefCorp bonds were not | | | | at all.The most vicious of all banking affairs in this |
| backed by a federal guarantee. Still, the fact that | | | | part of the world occurred in Paraguay a year |
| RefCorp was a federal entity, associated with the | | | | later. The Treasure of the Central Bank, no less, |
| administration was enough to give it a federal | | | | was found using the Central Bank funds to run a |
| credit rating.People believed in the sincerity of the | | | | lucrative money lending operation. He lent 3 million |
| commitment of the government and in the long | | | | of the bank's funds before he was caught. |
| term repayment prospects of the bonds. They | | | | Needless to sat that he pocketed the interest |
| bought 300 billion worth and the money was | | | | payments. In April 1995, the Governor of the |
| immediately injected to heal the bankrupt | | | | Central Bank there decided that things were |
| institutions. Using long term debt - which was not | | | | getting too hot for him and he fled the country |
| even part of its obligations - the government was | | | | altogether. The public was in panic. No one knew |
| able to stabilize the financial system and to fully | | | | what happened to the reserves of the |
| compensate depositors for their money.A similar | | | | commercial banks which were deposited with the |
| approach was adopted by Israel to cope with its | | | | Central Banks. Banks with no reserves are very |
| 1983 banking crisis. The whole banking system | | | | shaky and dangerous institutions. So, depositors |
| collapsed as a result of a failure of a pyramid | | | | and savers queued in front of the banks to draw |
| scheme involving the banks' shares. The | | | | their money. It was a matter of a very short |
| government was faced with civil unrest and | | | | time before the banks became insolvent and |
| decided to compensate those who bought the | | | | closed down their operations, albeit "temporarily". |
| shares in the stock exchange.At first, the banks | | | | Four banks and 16 savings houses collapsed that |
| were nationalized and trading in their shares in the | | | | year and four more banks - the next. The bank |
| stock exchange was suspended to prevent panic | | | | supervision discovered mountains and oceans of |
| selling. The government, having become the | | | | black money on which the banks paid high rates |
| owner of the banks, declared a share buyback | | | | of interest. The legal "white" money - a much |
| scheme. Owners of bank shares were permitted | | | | smaller amount altogether - bore a lower rate of |
| to sell them to the government in three specific | | | | interest.The government adopted a politically |
| dates over a period of 9 years (originally, the | | | | brave decision: it would compensate only those |
| share buyback scheme was for a period of 6 | | | | depositors which deposited money on which they |
| years with two exit dates but it was prolonged). | | | | paid taxes ("legal money"). Even so, the damage |
| The price at which the government agreed to | | | | was great (in Paraguayan terms): 450 million USD. |
| buy the shares back from the public was the | | | | Those depositors who received excess interest |
| price on the last day that the shares were traded | | | | payments on their undeclared funds - lost both |
| prior to the collapse (5/10/83) and it was linked to | | | | their funds and the interest accruing thereon. |
| the exchange rate of the Shekel-USD. The | | | | Moreover, the government forced the owners of |
| government used funds allocated within the | | | | the banks to increase the equity capital. The |
| national budget to buy the shares back. This | | | | system was saved, though the basic malaise was |
| means that it used taxpayers money to financially | | | | not cured and the banking system is still obscure, |
| save a select group of shareholders. But there | | | | secretive, nepotistic and highly dangerous.A course |
| was no public outcry: so many people were | | | | very similar to that chosen by Macedonia was |
| involved in these pyramid schemes for so long | | | | adopted by the government of Japan.In 1990, the |
| that all the citizens stood to benefit from this | | | | Tokyo Stock Exchange began its long 50% |
| generous handout. When the last shares were | | | | decline. People lost trillions of USD.As a result, they |
| bought in 1992 the total damage became evident: | | | | had no money to continue to pay the outlandish |
| no less than 6 billion USD (minus what the | | | | prices which were demanded by sellers of real |
| government could get when it were to sell the | | | | estate property. So, real estate prices went down |
| banks that it owned).1994 was arguably the | | | | by as much as 80% in the Tokyo area - and by |
| worst year for banks in South America since | | | | a bit less elsewhere in Japan. Real estate property |
| 1982. Banks collapsed all over that region.It | | | | served as the main security on huge portfolios of |
| started with Venezuela in January 1994. One of | | | | loans which were provided by banks through |
| the major banks there, Banco Latino, failed, | | | | Junsen, financing corporations set up especially to |
| dragging with it 7 others. The Government | | | | provide mortgage collateralised loans.The logical - |
| decided to fully compensate all the depositors and | | | | and inevitable - result was the collapse of seven |
| savers in these banks. It has created a special | | | | important Junsen, followed by a chain reaction of |
| fund to which revenues from the sale of oil were | | | | banks ceasing to function.The Japanese |
| transferred. Obviously, this money was taken | | | | government set up a special agency, the HLAC, |
| away from the budget and was compensated for | | | | which "cleaned" the books of the banks by taking |
| by extra taxation. The whole economy was | | | | over the non-performing loans. |
| horribly effected: inflation shot up uncontrollably, a | | | | |