Thursday, 19 February 2009

Recommended: Bloomberg Story on Stanford Bank and Its Latin Investors

La crisis de confianza está tornandose peor cada día

Read this good story by Bloomberg Caracas bureau chief Matt Walter (click here.) He makes a very good point here -- the very unstable macro economic environment of the past decades forced million of Latins to seek off-shore investments as a safe haven for their savings. Even though such instability has eased, people still remained quite confident of the safety of their off-shore investments. ''Your money isn't safe anywhere,´´ says one of the people interviewed for this story. A sign of these times. People will go back-to-basics, demand less riskier investments, in some way putting the brakes on the development of more sophisticated, deeper financial markets.

We always try to recall some historical event of statistical data to back some of the assertions made here. High inflation, currency devaluations, excess spending have for years cast doubts over the seriousness of economic policies carried out in the region and the commitment of the domestic financial sectors to design products safe and attractive enough to protect savings or channel those savings into new credit and investment. Venezuelans moved $8 billion out of the country on average every year between 1999 and 2006 (the Hugo Chávez years,) up from $2 billion a year over the previous five decades, according to a study by Emilio Medina Smith, a former economics professor at Carabobo University. More than $1.2 billion were reportedly raised by the illegal pyramids schemes in Colombia since 2003 (the Alvaro Uribe years) because of weak oversight. Families affected by the loss of their lifetime savings told TV news programmes in interviews that they agreed to pour their money into these pyramids because deposit rates paid by banks for their money were just too low. Obviously, the poor isn't immune to greed. But you can't blame them either -- the financial system in Colombia has failed to offer interesting investment alternatives for low-income families; opening a bank account in Colombia requires the presentation of a large list of documents. It's a real pain. Bancarisation indexes in Mexico (18 percent) and Colombia (27 percent) show the potential of new businesses for the local financial system -- banks must change their attitude towards depositors, and start treating them as investors.

This new scandal, coupled with Bernard Madoff's pyramid, plus the Colombian pyramids scheme, plus the Brazilian and Mexican derivatives scandals that triggered a tumble in stocks, is helping erode the confidence in financial markets built up for years, and giving another excuse to populist presidents and politicians (most them opportunistic idiots) for launching attacks on banks and free markets and corporate independence.

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