Govt. tries long-term bonds to lower consumer rates

- Tuesday, September 3, 2002

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Chile's government plans to again apply downward pressure on interest rates for consumer lending and this time by having the central bank issue bonds with longer terms.

The central bank said in a statement that as of Tuesday it would begin to issue new bonds called Bonos Banco Central on the market and expects the longer maturities to have a positive effect on commercial banks' consumer lending rates.

It should be easier for banks to reduce their consumer loan interest rates through the central bank's move, an analyst from Santander Investment told BNamericas.

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The possibility of acquiring bonds with longer maturities from the Central Bank will provide banks with a lower funding cost and instruments that will better match the maturities of their assets, he said.

The central bank's reform of its debt issuance mechanism will result in a higher degree of peso-denominated debt issues and a reduction of issues denominated in Chile's inflation-adjusted currency, the UF, the central bank said.

The reform will also see the new bonds adapted to international standards, meaning the central bank will issue bonds with the characteristics of so called "bullet bonds" that pay interest on a half-yearly basis and the capital when the bonds mature.

The bonds the central bank issues in pesos will now come with two- and five-year maturities, rather than just two years. The central bank's UF-denominated bonds will now be issued with maturities of five, 10 and 20 years, rather than eight and 20 years. Finally, dollar-denominated bonds issued with two-, three- and four-year maturities will be replaced with bonds maturing in two and five years.

The government has sought to reactivate the sluggish economy and almost two-digit unemployment by trying to make consumer loans cheaper for the general public.

This year the government lashed out at the private banks for not following the central bank's many aggressive cuts in the benchmark interest rate. That dispute resulted in the government opening up the consumer-lending segment to insurance groups in a bid to increase competition and put pressure on consumer interest rates.

It is hard for the banks to lower their interest rates at the same rhythm as the central bank because they have to consider the risk factor when the economy is sluggish and unemployment is high, according to Ohio National Seguros de Vida president Ignacio Montes.

Montes, a former board member of BBVA Banco Bhif (NYSE:BB), said that when there is a possibility of unemployment rising further, the banks become wary of lowering interest rates because their stock of bad loans may increase and that means higher costs in the form of increased loan-loss provisions.

Chile's banking regulator has also played an active role in the government's quest to jumpstart consumer loan demand. Last year, the regulator lowered the minimum capital required to open a bank so that smaller niche banks could be formed to specialize in consumer lending and lending to small- and mid-sized enterprises.

The banking regulator has also forced banks to improve publication of the real cost of the interest rates they charge to boost competition. The regulator also publishes banks' consumer loan rates regularly on its website.

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