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DE RUEHSG #0915/01 2881659
ZNR UUUUU ZZH
O 141659Z OCT 08
FM AMEMBASSY SANTIAGO
TO RUEHC/SECSTATE WASHDC IMMEDIATE 3807
INFO RUEHWH/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS
RUEHSO/AMCONSUL SAO PAULO 0783
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEKJCS/SECDEF WASHDC
RUEAIIA/CIA WASHDC
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 02 SANTIAGO 000915 
 
STATE PLEASE PASS TO USTR KDUCKWORTH/MSULLIVAN 
TREASURY FOR SSENICH 
COMMERCE FOR KMANN 
 
SENSITIVE 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD EINV ECIN PGOV PREL CI
 
SUBJECT:  UPDATE ON CHILE'S ECONOMY:  OCTOBER 10 SEES CONTINUED FALL 
IN MARKETS 
 
REF:  SANTIAGO 909 
 
¶1. (U) SUMMARY:  This is the second in a series of reports on major 
developments in Chile's economy in the face of recent, global 
financial turmoil.  On Friday, October 10, there were continued 
declines in the price of copper, Chile's exchange rate, and the 
stock market.  Chile's private pension funds reported significant 
losses due to the financial crisis.  Liquidity has remained stable 
in Chile's banking sector, due mostly to interventions by the 
Central Bank, but remains an issue of concern, especially as it 
affects lending to local small- and medium-sized enterprises.  END 
SUMMARY. 
 
Copper Prices Slump Again 
------------------------- 
 
¶2. (U) 3-month futures on the London Metals Exchange were down 11% 
on the day to $2.14/pound.  Copper was down 20% for the week, its 
lowest point since March 2006. 
 
Chilean Peso Down vs. U.S. Dollar 
--------------------------------- 
 
¶3. (U) The Chilean Peso lost more ground against the U.S. Dollar, 
closing at 638 Chilean Pesos to 1 U.S. Dollar (down over 4%).  The 
Peso has fallen 20% year-to-date and was at its lowest level against 
the Dollar in 4 years. 
 
Stock Market Drops Again 
------------------------ 
 
¶4. (U) The IPSA index dropped again, losing more than 5% of its 
value from yesterday's close.  The IPSA has dropped more than 20% 
this week. 
 
Private Pension Funds Take A Big Hit 
------------------------------------ 
 
¶5. (U) Chile's Superintendency of Pension Fund Administrators 
announced that the nation's private pension funds had been impacted 
heavily by the effects of the global financial crisis.  The "A 
Fund," the riskiest fund which invests in stocks, lost 11.8% of its 
value in the month of September alone. 
 
Central Bank Holds Key Rates Steady 
----------------------------------- 
 
¶6. (U) The Central Bank announced it will keep interest rates at 
8.25% (instead of raising them to fight inflation), in view of the 
global financial turmoil. 
 
Central Bank Changes Reserve Requirements 
----------------------------------------- 
 
¶7. (U) The Central Bank will temporarily allow Chilean banks to meet 
reserve requirements in currencies other than U.S. Dollars (e.g., 
Chilean peso). 
 
Central Bank Focused On Maintaining Liquidity 
--------------------------------------------- 
 
¶8. (SBU) Contacts at the Central Bank told the Embassy that the Bank 
has formed a special committee to monitor international credit 
conditions.  The Central Bank sees its principal role as assuring 
liquidity in the financial sector, and believes it has sufficient 
reserves to do that job.  Liquidity is thought to be adequate at the 
moment, as can be seen in response to the Central Bank's offers of 
currency swaps.  The terms of the swaps have been increased from 28 
days to 180 days.  In the first offering of $500 million, only $350 
million was taken, and only $30 million of the $500 million was 
taken in the second offer. 
 
Banking Superintendency Sees Adequate Liquidity 
--------------------------------------------- -- 
 
¶9. (SBU) Contacts at the Superintendency of Banks told the Embassy 
that liquidity is at "normal" levels (both in local and foreign 
currency) in the banking sector, given the current situation. 
 
SANTIAGO 00000915  002 OF 002 
 
 
Heads of Chilean banks met Wednesday, October 8, to assess sector 
conditions.  The consensus was that there is no panic, but credit is 
tightening, and the Central Bank needs to assist in maintaining the 
current levels of liquidity. 
 
Local Lending Worries Head of Banking Association 
--------------------------------------------- ---- 
 
¶10. (SBU) In a conversation with Ambassador Simons, Hernan 
Somerville,  President of Chile's private bank association said 
Chile's banks are well equipped on the liability side to withstand 
the crisis.  International lines of credit are tightening somewhat 
but can be easily replenished from auctions of Central Bank reserves 
and, if needed, Chile's $25 billion in sovereign wealth funds. 
Banks are pleased with the responsiveness thus far of Finance 
Minister Velasco and Central Bank President De Gregorio. 
 
¶11. (SBU) Somerville was more worried about the asset side.  If 
banks cut back too severely on credit lines to small/medium 
businesses and hoard cash, this could impact the real economy.  He 
is trying to convince the banks to keep credit broadly available. 
The local stock market was falling in line with international 
trends.  Somerville believed the U.S. needed to send a firmer signal 
on the bank rescue to stop the downward trend.  Local stock market 
drops could eventually affect public support for Chile's privatized 
pension system as equity-rich funds had taken big hits.  This could 
also motivate big family holders to buy back cheap equity, which 
would not be good for the depth of capital markets in Chile. 
 
Local Bank Says Credit Tighter for Smaller Companies 
--------------------------------------------- ------- 
 
¶12. (SBU) Contacts at BCI, a private Chilean bank, noted it was 
becoming quite difficult for small- to medium-size enterprises in 
the Chilean private sector to take out new loans (mostly because of 
heightened credit requirements).  However, BCI was willing to 
renegotiate the terms of existing loans if these companies ran into 
trouble. 
SIMONS