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Chilean Crisis 1981

Monetary Policy. Chilean Crisis 1981. Jared Felice Ellen Robertson Shawn Roller Jason Sullivan. Chilean Crisis. Overview. GDP = $33 Billion Population = 11 Million Less than 1/10th the size of US Separated Powers Central Bank Currency = Peso. President: 1970 - 1973. Salvador Allende.

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Chilean Crisis 1981

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  1. Monetary Policy Chilean Crisis 1981 Jared Felice Ellen Robertson Shawn Roller Jason Sullivan

  2. Chilean Crisis Overview GDP = $33 Billion Population = 11 Million Less than 1/10th the size of US Separated Powers Central Bank Currency = Peso

  3. President: 1970 - 1973 Salvador Allende Elected in a multiparty system Poor economic condition Nationalized major industries Implemented a wage freeze Died during overthrow

  4. President: 1973 - 1990 Augusto Pinochet 1973 - Coup d’état created Junta (CIA) Chicago Boys Many free market principles Privatized many industries Crawling Peg Currency

  5. How did it start? • Two years prior to mid 1981, domestic private demand for consumption and fixed capital investments had increased rapidly. • Boom 1978-81, this led to changes in relative prices, in particular an increase in real wages. • Because of a new 1980 Constitution, the government was unwilling to abandon its newpolicy. • Bank’s loan portfolios reflected excessive risk taking. (Over leveraging)

  6. Stabilization of the Currency

  7. Over leveraging 1970-76 • 1970-1973-Corporation de Fomento (CORFO). • 1975 Re-privatization of CORFO own banks auctioned off. Bidders could borrow up to 90% of the price. • 1975 recovery from previous recession lead government to rely on private banks and lead to under regulation. • 1976 The Banco Osorno and several financial companies failed.

  8. 1976-1979 • The recession of 1976-1979 and the change in rules lead people in to a sense of euphoria about the future. Foreign loans in 1977 were 3.3% by 1982 they were 20.5%. • Rules regarding foreign borrowing changed and by 1980 foreign and domestic liabilities were subject to the same rules. • In 1981 global economy was in a recession.

  9. Over Leveraging Interest rate on bank loans. They were also buying nonperforming loans. Reform of banking policies.

  10. Resolution • Loan Portfolios • First: Restructuring debts denominated in US dollars and was precipitated by the devaluation of the peso in June 1982. • Second: One relief to several groups of debtors • Third: Allowed the banks to sell their substandard loans to the Central Bank. • Domestic Liabilities • Bank Runs and interest rates • Foreign Liabilities • Debt reduction programs

  11. Resolution • Recapitalizations of Banks • Sell substandard loans to the Central Bank • Generate surplus for banks • Bank/Company Takeovers • Includes liquidations and rehabilitations • Re- Privatization • Banco de Chile and Banco Santiago

  12. References • Hernández, Leonardo. Origins and Resolution of a Banking Crisis: Chile 1982-86. Working paper no. 057. Central Bank of Chile, Dec. 1999. Web. 31 Mar. 2014. • Hornbeck, J. F. The U.S. Financial Crisis: Lessons From Chile. Rep. no. RS22961. Congressional Research Service, 28 Sept. 2008. Web. 31 Mar. 2014. • "World DataBank." The World Bank DataBank. The World Bank Group, n.d. Web. 30 Mar. 2014.

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