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Thursday, 8 August, 2002, 20:20 GMT 21:20 UK
Bolivia's banks down but not out
Bolivian savers queue outside a bank
Bolivian workers fear for their savings

Bolivia's banking system is going through difficult times.

Deposits have fallen sharply and unrecoverable debt has risen to unprecedented levels.

Some national banks are fighting just to keep their heads above water.

Argentina's economic collapse and the loss of investor confidence in Brazil are reverberating through Uruguay and Paraguay, raising fears of regional economic meltdown.

But there is still hope that Bolivia can avoid the kind of collapse that has seen its neighbours go cap-in-hand to the IMF for a last minute bailout.

Political insecurity

The decline in Bolivian bank deposits is not a new phenomenon.

A four-year economic slump has seen around $1.5bn, or one third of all deposits, leave the banking system.

But political insecurity in the run-up to elections on 30 June this year intensified the problem.

The rise of political parties promising radical changes to investment laws saw deposits fall by ten percent in the first half of the year.

As the results came in, the lack of a clear winner added fuel to the fire.

Free market reformist, Gonzalo Sanchez de Lozada, topped the polls with 22.5%, but failed in initial attempts to find coalition partners to form a government.

Another $200m poured out of the banks in twenty-one days of turmoil before a deal was finally struck with the fourth-placed Revolutionary Left Movement, securing a parliamentary majority.

The system could have buckled under the strain but for the timely intervention of the Bolivian Central Bank.

It recalled $800m of cash reserves from outside the country in the last week of June, staving off a liquidity crisis that could have triggered a collapse in savers' confidence.

The banking sector has declined to comment on the situation, but one industry insider, who asked not to be named, said:

"The Central Bank managed the situation superbly. Its intervention was crucial in supporting the July withdrawals."

Reasons for hope

The source, a candidate for the post of Finance Minister in the new government, also commented that Bolivia's debt structure was a big factor in helping the financial system avoid a crisis.

Virtually all of Bolivia's external debt is with foreign states or multinational organisations such as the World Bank and International Monetary Fund.

As South America's poorest country, Bolivia is also a beneficiary of the Highly Indebted Poor Country (HIPC) scheme.

This means around half its payments on bilateral and multilateral debt are reinvested within the country, preventing a drain on precious US Dollar reserves.

"The debt structure is what prevented Bolivia turning into Argentina or Uruguay," said the source.

"This wasn't policy, it was luck."

Ironically, another factor related to poverty is also bolstering Bolivia's financial institutions.

The country's enormous wealth divide means 50% of bank deposits are held by less than one percent of savers, and these crucial few are still maintaining their faith in the banking system, rather than pulling the plug on it.

What could go wrong?

Responsible economic management will be critical if the new government is to retain the confidence of these wealthy Bolivians.

Sanchez de Lozada will need to steer Bolivia out of a slump that has seen poverty, unemployment and social conflicts soar.

But it will also be necessary to avoid irresponsible spending in the face of social pressures.

"If they commit errors that cause uncertainty and a lack of confidence, this could produce a crisis in the banking sector and a run on deposits that the banks cannot support," said La Paz-based analyst Napoleon Pacheco.

In the short term Pacheco believes it will also be necessary to bail out two or three national banks, which, weighed down by unrecoverable debts, are on the verge of going under.

"If they leave these banks to go bust it will send shockwaves of uncertainty through the country," he said. "People will be scared they could lose their savings."

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