(Updates with jobs and inflation data from 15th paragraph.)
Feb. 6 (Bloomberg) -- Chilean banks borrowed 19 times more pesos than U.S. dollars from authorities in December, indicating that a surge in bank funding costs was more local than external.
Banks borrowed $49.8 million in U.S. dollars from the finance ministry as policy makers fought to control a liquidity squeeze, according to the budget office’s written response to a Bloomberg News freedom of information request. That compares with the equivalent of $952 million in pesos lent by the central bank during the same period.
December’s surge in short-term debt yields, a sign to central bank President Rodrigo Vergara that the European financial crisis was impacting Chilean markets, forced mutual fund managers to revalue their funds and recognize losses. The low demand for dollar loans suggests the crunch wasn’t caused by foreign banks cutting off access, said Felipe Alarcon, who worked on the central bank’s markets desk until 2010.
“Banks clearly were more concerned about liquidity in pesos,” said Alarcon, now an economist at Banco de Credito & Inversiones in Santiago. “There was doom and gloom internationally and there may have been a bit of a local overreaction.”
The government lent $25 million for 30 days at an average annualized interest rate of 1.6 percent and $24.9 million for 90 days at an average rate of 2.19 percent between Dec. 22 and Dec. 30, Budget Director Rosanna Costa wrote.
The average yields Chilean banks pay to borrow in pesos for between 30 and 89 days rose to 6.96 percent on Dec. 22, the highest since January 2009, according to the central bank. The rate fell to 5.28 percent on Jan. 31. The average rate at which banks lend between 30 and 89 days fell to 9.84 percent in January from 10.2 percent in December.
Worse Than Usual
Liquidity often falls at the end of the year in Chile as companies seek cash to bolster balance sheets, withdrawing money from the short-term debt funds that lend to the banks. This year’s squeeze was worse than usual on concerns that European banks would cut lending to Latin America.
“The local financial market has observed increased friction of late because of the tightening of global financial conditions,” the central bank’s Vergara said on Dec. 20.
Chile is the most connected to the European banking system among Latin American economies, according to research from the International Monetary Fund. Economists at Santiago-based brokerage Larrain Vial SA wrote on Dec. 26 that the spike in yields might be “the first symptoms of the financial market reacting to the euro crisis.”
The central bank bought $952 million worth of assets denominated in pesos for repurchase in three months or less between Dec. 21 and Dec. 30. Short-term borrowing costs in pesos plunged after the intervention. In the repurchase, or repo, market banks can pawn bonds in exchange for a cash loan. The central bank will stop providing loans through its repo program tomorrow.
The government’s announcement that it would lend dollars to banks was part of an effort to ease funding shortages, Finance Minister Felipe Larrain said on Jan. 3. The government auctioned the funds on Dec. 27 and Dec. 29.
“From an investment point of view we are getting a better return from investing those deposits in Chile compared to what we could get outside, but at the same time we’re providing liquidity to the local market,” Larrain said.
He declined to comment on the amounts involved. Costa’s response to Bloomberg’s request for more information, submitted to the finance ministry on Dec. 27 under the country’s transparency law, does not mention two further auctions that Larrain had said would be carried out on Jan. 3 and Jan. 5.
Budget office officials weren’t available for comment on the planned January auctions, a press relations officer said by telephone after normal business hours on Feb. 3.
After December’s surge in yields, the central bank unexpectedly lowered its benchmark interest rate in January, saying that while the money market had normalized, financing for some borrowers was still restricted. Data published since the bank’s decision have shown that unemployment fell to the lowest in more than two years and the economy grew faster than expected in December.
Economic activity expanded 5.3 percent in December, the central bank said today, faster than the 3.9 percent median forecast of 15 economists in a Bloomberg survey. Unemployment was 6.6 percent in the last three months of the year.
The National Statistics Institute is due to publish data on Feb. 8 that may show prices rose 0.17 percent in January, according to the forwards market for unidades de fomento, Chile’s inflation-linked currency unit. Annual inflation of 4.31 percent in January may not slow to the central bank’s target of 3 percent until February 2013, according to the forwards market.
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