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Venezuela Bankers Confident
By OWAIN JOHNSON, UPI Business Correspondent

CARACAS, Venezuela, June 13 (UPI) -- Venezuela's banks are in good shape despite the ravages of the oil-rich country's current recession, according to senior bankers.

The president of the Venezuelan Banking Association, Ignacio Salvatierra, said Thursday that the banking sector had successfully implemented a process of modernization and consolidation and was facing the downturn in the Venezuelan economy from a very strong position.

"As I have said many times before, the financial system is in very good shape," Salvatierra said. "One of the characteristics of Venezuela's financial system is that it possesses capital reserves far beyond those demanded by international institutions."

The Venezuelan economy contracted 4.2 percent in the first quarter of 2002, while borrowing has also declined dramatically in response to the country's high interest rates, which are currently running at between 40 percent and 65 percent.

The difficult situation for borrowers has led to a significant rise in defaults on bank loans that has hurt financial institutions' balance sheets. Salvatierra confirmed that the default rate could reach as much as 8 percent this year, but he said banks were aware of the risks and had made special provisions to absorb bad debts without damaging their overall stability.

Salvatierra's upbeat take on the state of Venezuela's financial system, which has been hit by a wave of rumors about its solvency in recent months, is also seemingly shared by Banking Regulator Antonio Simancas.

The regulator gave his assurance Wednesday that the banking system was solvent, balanced and was not suffering serious cash flow problems, despite a series of allegations in the local press that liquidity problems could force the closure of some of Venezuela's smaller banks. In the next breath, however, Simancas raised eyebrows by publicly warning financial institutions not to falsify their accounts; a statement that hardly suggests great confidence in the relatively healthy balance sheets submitted to his office.

"Current banking legislation establishes prison terms of eight or more years for people providing us with false information," he warned. Despite Simancas' note of caution, regulators, bankers and the Central Bank have been cooperating closely to address the challenges facing the financial system.

All sides are agreed that the future health of the Venezuelan banking system largely depends on the successful resolution of current cash-flow problems, and the Central Bank has regularly stepped in to help banks with liquidity issues in recent months.

The institution has bought back state bonds at advantageous rates from several banks suffering cash-flow problems, while promising to sell the bonds back to the same institutions once their financial position improves. The banking association's president emphasized though that the banking sector's liquidity levels are steadily improving after a fairly disastrous first quarter.

"People often make the mistake of confusing liquidity problems and the current economic situation with a genuine banking crisis," Salvatierra said. "This is wrong, the banks are improving and are growing their capital reserves in accordance with instructions from the regulator." The association president also said he was confident that the banks would see business improve once interest rates begin to fall. He said the process had already begun and he was confident that rates would soon reach a more sustainable level that would help generate an increase in economic activity.

The president of Banco Mercantil, Gustavo Marturet, said Wednesday that he believed interest rates would fall naturally if the government's new economic plan proved successful. The new plan is designed to reduce the government's huge fiscal shortfall through a combination of increasing tax revenue and borrowing from international lenders. Marturet said he was not, however, in favor of any agreement between banks and the government to fix interest rates at a lower level. "I have never believed in this kind of agreement," he said. "I have always believed instead in creating the appropriate conditions. It is much more efficient to create the economic conditions that will naturally lead to a fall in rates."

Marturet was speaking after the meeting Wednesday afternoon between senior bankers and President Hugo Chavez during which the bankers discussed the content of the government's new economic plan with the 'social revolutionary' president.

The Banking Association said it welcomed the chance to discuss the proposals and applauded Chavez's new consultative approach to economic issues, while Marturet said he was "cautiously optimistic" that the new plan would bear fruit.

"If these proposals are properly carried out then they should create the desired results," Marturet said. "The future success of this country depends on the success of this plan."


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