Asset sell-off biggest threat to Chile’s financial stability – Marcel

Mario Marcel, the governor of the Central Bank of Chile, has warned “the repeat of forced asset liquidations” is the “principal risk to financial stability”.

The governor was referring to three measures passed by the Chilean parliament during the pandemic, which allowed Chileans to withdraw savings from private pension accounts. This would inject cash into the economy and boost demand, a stimulus to counter the effects of Covid-19.

The Chilean Senate is currently discussing legislation providing for a fourth withdrawal; the lower house, the Chamber of Deputies, approved the measure in September. Marcel had expressed his opposition to the move in an August appearance before a chamber committee.

Presenting the central bank’s financial stability report to the Senate finance committee, Marcel said asset sales had drained local capital markets, as pension funds sought cash to fund withdrawals.

“The fall in the size of intermediate funds for pension funds reduces the capacity of the fixed-term market to provide long-term financing,” his report said. The central bank specifically noted that mortgage credit had become costlier.

Marcel warned that hollowing out local capital markets would risk capital flight and greater dependency on external sources of finance. The central bank also contended that the withdrawals had undermined public finances.

The report stated that almost 4 million people had exhausted their pension balances, the majority of them women (57%).

The central bank also warned that Chile was vulnerable to “reversals in risk appetites in the face of changes in the monetary policy orientation of the principal economies”. This may refer to tapering and higher interest rates in the global north. The US Federal Reserve announced the beginning of its taper on November 3.