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Brazilian state bank Banco do Estado do

  • Parana has decided to exit Paraguay, making it the second foreign bank this year to leave the troubled country.

    Dutch financial group ING decided earlier this month to exit Paraguay as part of a global restructuring process of its corporate banking division.

    Although both banks had a small presence in the country, a depressed local economy and the weak financial system are not working in Paraguay’s favour.

    Banco Parana has requested a voluntary liquidation from authorities and the closure process could last between six and 18 months. The Brazilian bank is preferring to close shop and leave rather than sell its local unit to other Paraguayan banks.

    Paraguay’s banking industry suffered a severe blow last year when one of its strongest banks, Banco Aleman, went under and provoked a deposit flight that saw one third of all deposits, about US$435mn, leave the financial system.

    Standard & Poor’s decision recently to lower Paraguay’s long-term foreign currency credit rating to a selective default rating SD, from B- has added to the country’s financial woes.

    The rating action was prompted by the government’s failure to comply with the put option exercised by local bondholders of US dollar-denominated obligations. The bonds, with US$20mn currently outstanding, mature in 2005, but the terms and conditions of the debt allow bondholders to exercise a put option every year until maturity.

    The government has not complied with the terms since investors exercised the option on the bonds in late December 2002 and although the government is in talks with the local banks that hold the defaulted bonds “full repayment of this debt seems unlikely in the coming weeks,” given the Paraguayan government’s limited liquidity, S&P sovereign analyst Sebastian Briozzo says.

    Just like the Japanese authorities did when rival rating agency Moody’s downgraded Japan last year, the Paraguayan authorities have come out strongly against S&P’s latest rating action. Finance minister Alcides Jimenez has told local press the downgrade is local banks’ way of getting even, through S&P, for a government decision last month to transfer public deposits from private banks to the central bank in a bid to curb speculation against the local currency.

    According to S&P, the government is finding it difficult to secure alternative sources of financing to cover both the fiscal deficit, estimated at around 3% of GDP for 2003 or around US$120mn, and the maturing debt, which totals about US$100mn.

    Paraguay’s economy contracted 2.2% in 2002 due in part to financial woes in Argentina and Brazil. After four years of almost zero-growth the economy is expected to recover this year, growing 1.5% according to the central bank’s preliminary forecast.