Monday, May 21, 2007

Correa: Coming Out of the Closet

I haven't had a chance to post in a while as I'm in the midst of negotiating the start of two new businesses here in Quito, and now I'm considering a fourth business in Quito as well; I've gone kind of crazy in terms of investing here, lately, threats of harebrained socialist schemes from the Correa government notwithstanding.

Still, I've tried to follow events here, and I have to say Rafael Correa has been a real boon for the media even as he bashes the hell out of them.

Every Saturday morning for the last, oh, ten weeks or so, Correa has done a radio show with call ins that last roughly two hours (idea for name of the show: Alo, Presidente; I kind of like it). Correa has used the programs to tout various governmental programs and push for various legislative initiatives on subjects ranging from bank and banking reforms to reforms of the tax code to the creation of two new provinces at the expense of the two largest existing provinces.

While different subjects are addressed on each program, Correa has used virtually every Saturday program to hammer two consistent themes: 1) Bankers are a bunch of collusive, usurious crooks, who need to mend their ways; and 2) The media, especially the electronic media, are corrupt liars who exploit their workers and parrot the thoughts of their capitalist masters. - and they need to mend their ways too.

On the first point, that of the banking system, Correa y cia have implemented a two pronged strategy aimed at taking institutional control of the bank supervision (oversight) system and the Central Bank while he seeks to legislate changes in banking laws, most notably those pertaining to the interest rates, commissions and fees the banks charge.

I've said in the earlier postings that then banking community has had a downright wonderful policy ambience here for the last 10+ years (thanks mostly the current Constitution, written in 1998) because it essentially allows the banks to regulate themselves via an entity known as the Superintendency of Banks and Insurance. That mechanism allowed the banks to go on an irresponsible lending rampage in the late 90's that resulted in the failure of several of the largest banks in the country. Heads of some of those banks fled the country and with the exception of a couple of bank presidents, most of the culprits have escaped retribution for having destroyed the life savings of tens of thousands of Ecuadorian. BTW, that same lending splurge (together with other factors like lowered import tariffs) contributed to the inflation explosion that culminated in dollarization of the economy here in 2000.

The surviving bankers were not fazed by any of the foregoing events, and they simply went back to their same old practices of lending to at low rates on almost totally unsecured loans to their big corporate buddies (or in some cases businesses owned by their owners; no conflict of interest there!) while charging smaller clients and arm and a leg in interest and commission/fee charges, while requiring 100% or even 200% collateral guarantees on those smaller loans. (In fairness to Ecuador, the banks here are not unique in LA on these practices; I've seen the same sort of shenanigans in pretty much all of the other seven countries I've lived in down here.)

Anyway.... Correa's finally come in and he's calling a spade a spade, accusing the bankers of running a cozy, opaque system that really runs in their favor and not that of the vast majority of their clients . So he's come out with a draft law which would control interest rates, prohibit the application of most commissions and fees, and require all banks and S&L cooperatives to post their rates and profits, etc., publically. The same draft law would restructure the Bank Board system so as to give the government much more influence in overseeing, indeed running the bank sector.

At the same time, Correa has staged a coup within the banking oversight system by placing several of his allies on the oversight entity, the Bank Board (Junta Bancaria) such that he now has majority control of the Board. (Note: Things are complicated right now on JB because the President of the Board is the Superintendent of Banks, who's not a friend of Correa's and who has veto power over Board decisions; Correa hopes to rectify this as well via his draft banking law as I say, but we'll see.) As well, Correa has somehow managed to force the Manager of the Central Bank , a conscientious professional CB sort, to resign from the CB and Bank Board, which removed a respected Correa opponent from the policy arena.

In moving on these two fronts, policy via the draft law, and institutional via the Bank Board takeover, Correa has moved a long way toward governmental control of bank policies, which pleases many, including me, from a visceral standpoint. That said, economically speaking, I've never/never seen a controlled interest rate system succeed in achieving its putative goal of making more and cheaper credit available to the public on a sustainable basis, anywhere in LA, ever. Right now, then, it looks to me like Correa will provide cheap, short term politcal gratification to the voters at the expense of bankers (And who likes bankers? They're right down there with lawyers on the Rodney Dangerfield respect list) , but it'll cost us in the long run in terms of affordable credit availability...

OK, I'm going to close this post because it's gotten kind of long. The next post will address Correa's war on the press, and after that, I think a separate post on the juegos of our Minister of Economy and Finance, Ricardo Patino, Ecuador's very own minor league, Vladamiro Montesinos...

1 comment:

Incognito said...

You better hope he doesn't continue down that path. Nationalizing of private enterprises are a favorite pasttime.

Things have certainly changed since I last lived in Quito, as a teen: 1970 - 72.