Ecuador's financial crisis came to a head in mid-March. With 10 banks closed or subject to state intervention in the past nine months, depositors have lost confidence. A major run on the banks was only avoided when the government declared a week-long bank holiday on March 8 and imposed a freeze on $1.5 billion in sucre and dollar deposits, for up to a year. Already struggling to cut a severe fiscal deficit, the government could not make good immediately on last year's legislation guaranteeing deposits. Now it is looking for help from international auditors and multilateral financiers to cleanse, downsize and recapitalize banks.
The Ecuadoran state has acquired alarmingly large exposure to the financial sector reckons Quito-based consultancy Multiplica. As a result of the state's "rescue" measures since 1996, it controls 39% of financial-sector assets, 42% of loans, 35% of deposits and 64% of profits, Multiplica reports. Liquidity and contingency loans to the financial sector by the central bank now exceed $900 million with an increase of $200 million in March alone. To hold down resulting pressures on inflation and the exchange rate, the government froze deposits.
But of most concern to many analysts is how, and at what cost, the state can make good on its pledge to guarantee deposits as more and more banks come under its wing. The Agencia de Garantía de Depósitos (AGD), set up last year to guarantee deposits and take charge of restructuring banks, has minimal resources. Long term, it is meant to be capitalized by compulsory contributions from the banks, but so far the state has been unable to sell any of the banking assets it controls, in order to fund it. If Ecuador can reach agreement on a standby programme with the IMF over the next few months, $400 million of multilateral funding will be available for the AGD.
Clear signals from the government that it is prepared to carry out an impartial cleansing of banks are among the prerequisites of an IMF agreement. So far the government has been slow and insufficiently proactive in its response to the crisis, critics say. Apart from its financing constraints, it has been reluctant to close large banks from the coast for fear of intensifying regional tensions between political opponents there and the highland central government. Coastal banks' loan portfolios were the hardest hit when El Niño devastated agro-exports last year. Coastal bankers, however, claim a bias in government and central-bank policy in favour of highland institutions.
But "we can't have a Sword of Damocles hanging over us. The financial sector must by strengthened and cleansed," president Jamil Mahuad now says. In April, the government hired five international audit firms to carry out a review by early July. Banks will be put in three categories: those in relatively good shape, those with serious problems but a chance of recovery, and those for which little can be done. "Who here in Ecuador can say this without being accused of something?" asks Mahuad. "We will have a clear, precise and sure view and with this information we must take the decisions on cleansing.".
A twofold programme is needed to strengthen surviving banks, says Nicolás Landes, president of Banco Popular. First, banks need credit lines to reschedule debts of viable customers over the medium term. Second, Ecuador must look at what has been done elsewhere to strengthen bank equity.
In view of the state's weak finances, liquidity to reschedule debts will only be available if Ecuador does obtain an IMF agreement. A project launched by the government last year to swap bank portfolios for debt issued by state second-tier bank Corporación Financiera Nacional (CFN) came under fire from bankers as it would provide them with no new liquidity. The Asociación de Bancos Privados, the private banks' association, is preparing a counter-proposal.
"To prevent future banking crises, it is not enough just to reform laws but banking supervision must also improve," says Luis Jácome, former president of the central bank board. "There must be strengthening at all levels but there has been a problem of political decision at the highest level for several years," he says. "Regulators also need greater legal security so their reports do not bring the threat of a lawsuit." The position of superintendent could be depoliticized were the occupant appointed for a six-to-eight-year term by an electoral college, suggests Fidel Egas, president of Banco del Pichincha.
Banking regulations are already considered tight. On a witch hunt for those responsible for the latest crisis, congress has moved to close remaining loopholes in the law. The government has backed this and if its amendments are accepted by congress, limits on related-party lending will be cut from 60% to 10% of equity. Limits on concentration of credit have also been introduced.
With regulations tightening, a clampdown on regulators and an unbiased restructuring and recapitalization planned, maybe there is hope for a few banks. Analysts suggest eight to 12 would be appropriate not the current 35. Justine Newsome