Prolonged pandemic still 'biggest risk to Chilean financial system' - central bank

SANTIAGO, Nov 11 (Reuters) - The continuing coronavirus pandemic poses the most significant risk to Chile’s financial system as institutions’ capacity to take mitigating action diminishes, the country’s Central Bank warned in a report on Wednesday.

The bank said it had already expended 40% of its assets up to August to maintain liquidity and bolster credit markets.

Institutions’ dwindling capacity to take extraordinary measures, and low growth that could deepen the effects of the health crisis, risked transforming “liquidity problems into solvency complications,” it said.

“These measures were designed to deal with liquidity problems temporarily,” it added in its Financial Stability Report (IEF).

While measures more extensive than those taken by central banks during the global financial crisis had helped reduce volatility, in Chile this remained high in the foreign exchange and sovereign bond markets, it said.

The bank said flags had been raised about Chile’s sovereign debt rating because of a “sustained” increase in public debt and deterioration in balance sheets, coupled more lately with a USD$29 billion coronavirus package the government announced including mortgage deferrals and emergency loans.

Some of these measures could have “undesirable effects” including complicating the evaluation of credit risks and the setting of interest rates, the bank said.

It highlighted additional domestic risks including “changes to the legal framework” which could “render more difficult the functioning of financial markets and the solvency of financial institutions.”

Chileans voted overwhelmingly last month for a new constitution. A key demand of fierce social protests, it has raised fears among businesses of disruptive changes that could blight investment.

A series of opposition moves to raid privately held pension funds has also generated jitters. On Tuesday, Chile’s lower house waved through a bill proposing a second drawdown from the funds after a first drawdown was approved in July. President Sebastian Pinera warned the new bill could leave four million people without pensions. (Reporting by Fabian Cambero and Aislinn Laing; Editing by Bernadette Baum)

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