We have been hit by a tsunami wave in the global financial markets, starting with the collapse of Silicon Valley Bank (SVB) and the near collapse of Credit Suisse. At the core is the policy of US and European central banks to raise interest rates to tame inflation. For consumers and businesses, higher rates mean higher debt costs. Which worsened the banks’ portfolio.

SVB took large deposits from technology companies and recklessly invested them in long-term bonds. With the Federal Reserve raising rates, SVB had to raise the interest it paid on deposits to a level higher than the interest earned on the bonds it bought. If interest did not rise, deposits were withdrawn, and in order to pay depositors, he had to sell bonds at a loss. The bank went bankrupt. The currency hike was the last straw for Credit Suisse, a major bank in Europe that has been in trouble for some time.

Silicon Valley Bank: 3 Differences Between the Collapse of This Financial Institution and the 2008 Banking Crisis

Shareholders of other mid-sized banks in the US and Europe were worried that the same thing would happen to them. Stock markets suffered a decline. Anxiety spread that the world economy was falling into recession. The Federal Reserve announced the bailout of SVB: shareholders lose capital, but all depositors will get their money back. The Swiss central bank announced the rescue of Credit Suisse at any cost.

The main consequence for Ecuador is the drop in oil prices…

There is no danger of contagion of the national financial system. The main consequence for Ecuador is the drop in the price of oil below the value foreseen in the state budget. It is too early to know whether the authorities of the central countries will be able to contain this emerging crisis. When they do, the price of oil will recover. But in the meantime, things are getting complicated for the national government.

Worried about banks in the US?

Budget revenues for January and February are already 13% below those in the same months of 2022, both due to lower oil revenues and lower tax collection. It was impossible for the authorities to reduce current consumption, and they had to give up increasing the price of energy products, which have a very high subsidy. This already difficult situation becomes even more complicated with the price of oil at $55, ten dollars lower than planned.

With the international financial market closed, the Government would tend to seek financing from local banks, but access to international loans dries up for the latter, and if the Government issues bonds, the bank will not have enough funds to lend to its clients. , which would lead the economy to stagnation.

In the end, the government will not be able to meet its budget obligations and there will be delays. Transfers to prefectures and municipalities will be reduced. The mayors and prefects will angrily claim that the Government does not respect them, and Finance will have to remind them that the transfers are a percentage of the collection, not the reference value that is in the budget.

A possible lower availability of loans will affect bank clients. In the event of a global recession, the market for our private exports would shrink. 2023 has become more difficult. (OR)