SANTIAGO, Chile -- Confidence in the Chilean financial system continues to dwindle despite the government's frantic efforts to avoid a major panic.
On Jan. 13 the Chilean economic authorities liquidated two banks and a finance company, sent provisional administrators to five banks, and placed inspectors in the boards of another two.
The government also decreed a banking holiday Friday Jan. 14 and heavily relied on mass media to assure depositors that their money was completely insured by the state until December this year.
However, the government also said it could not grant the same guarantee for deposits in Banco BHC, Banco BUF, and Financiera CIGA, the three institutions that were shutdown permanently.
These deposits will be subject to a government guarantee of up to Chilean pesos 260,000, about $2,200 at the current free-market rate. The remaining amount will be purchased by state-owned Banco del Estado at 70 percent of its value.
Although the government succeeded in avoiding a run, it has been unable to control chain reactions in the financial market such as the freezing for a week of mutual funds transactions, the plummeting of values in the stock exchange, and the closing of several companies associated with the institutions that were intervened.
The impact of these measures also falls on international concerns that have placed money in the three liquidated companies.
While Financiera CIGA does not have a foreign debt, Banco BHC owes $263 million and Banco BUF $138 million to international lenders.
The government said it will continue paying the principal and interest on the loans granted to the seven other institutions, but the terms for an arrangement with the liquidated companies are yet unclear.
Banking sources in Santiago say the Central Bank has initiated direct negotiations with Bank of America over part of BHC's foreign debt and that negotiations with other foreign lenders will follow.