Bloomberg News

Chile Central Bank to Boost Peso Liquidity as Yields Spike

January 04, 2012

(Adds comment from economist in fourth paragraph.)

Dec. 22 (Bloomberg) -- Chile’s central bank will offer three-month loans twice a week through Feb. 7 to bolster liquidity in money markets after short-term yields soared.

The 91-day repurchase operations mark the first change in monetary policy since Rodrigo Vergara took over as central bank president on Dec. 9. The repo window will start today and operations will take place every Tuesday and Thursday through the first week of February, the bank said on its website.

The 90-day interbank lending rate in pesos surged to 6.94 percent on Dec. 20, the highest since the banking association switched to calculating an annual rate in May 2010. While Chilean money markets often suffer a liquidity squeeze at the end of the year as companies sell mutual funds that invest in short term debt in order to have cash on their balance sheets, this year the squeeze has been exacerbated by concern the European debt crisis will affect Chilean banks.

“It has been getting slowly worse for about a month,” said Matias Madrid, chief economist of Banco Penta in Santiago. “Banks and companies always require more liquidity at the end of the year, but there is also the expectation that credit lines from Europe may get cut.”

The peso climbed 0.6 percent to 519.94 per U.S. dollar today, from 523.05 per dollar yesterday.

The yield on 10-year central bank bonds in pesos fell four basis points to 5.25 percent, while the yield on similar inflation-linked bonds increased two basis points to 2.6 percent. The central bank declared void an auction of 91-day and 28-day paper.

Interbank Rates

Inflation-linked interbank lending rates have climbed in the fourth quarter every year since 2001.

The year-end credit crunch in Chile often results in an increase of about 30 basis points, or 0.3 percentage point, in yields on term deposits that money-market funds invest in. The average rate spiked 48 basis points on Dec. 20 to 6.72 percent, the highest since February 2009, according to central bank data.

The jump in yields forced fund managers that buy short-term debt to change the valuation method they use and recognize losses. Money-market funds run by 13 fund managers reported losses of more than 0.1 percent for Dec. 20. They were led by BCI Asset Management Administradora General de Fondos SA’s Fondo Mutuo BCI Eficiente, which lost 0.2 percent, according to data compiled by the mutual funds association.

The local fund management units of Banco Bilbao Vizcaya Argentaria SA, ING Groep NV, Itau Unibanco Holding SA were among those announcing changes to fund valuations.

Term Deposits

Yields on term deposits were little changed today, said Andres de la Cerda, a money-markets trader at Bice Inversiones.

Chile’s Finance Ministry plans to use dollars from its current account to invest in term deposits starting next week, it said today in a statement. The ministry has been investing pesos from the same account since July, it said.

This year Chilean lenders have been trying to sell more deposits as a “preventive measure,” then using the funds to buy liquid assets in case the debt crisis in Europe worsens, said Felipe Alarcon, an economist at Banco de Credito e Inversiones in Santiago.

Chile’s financial system is the most exposed to Europe in Latin America. The country’s claims on European banks are worth 41 percent of its gross domestic product, according to a Dec. 12 research report from Morgan Stanley.

The average yield on a 30-day term deposits climbed to 6.72 percent on Dec. 20 from 5.64 percent a month earlier, according to central bank data.

The central bank will charge a floating rate on the repo facility, it said. Yesterday it opened a 19-day repurchase window at the benchmark interest rate of 5.25 percent.

In December 2008, after the collapse of Lehman Brothers Holdings Inc. policy makers started offering weekly repurchase operations. In repos, the central bank buys assets from dealers for a set period, temporarily boosting the amount of money available in the banking system. At maturity, the assets are returned to the dealers, and the cash to the monetary authority.

--With assistance from Randy Woods in Santiago. Editors: Brendan Walsh, Richard Richtmyer

To contact the reporter on this story: Sebastian Boyd in Santiago at sboyd9@bloomberg.net

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net


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