Venezuelan Bankers Wonder If the Fat Lady Has Sung Yet

VENEZUELA'S worst banking crisis in history may not yet be over, analysts say.

So far this year, the government has seized 10 failed banks, which account for more than one-half of the banking assets in the country. The government has guaranteed $6.1 billion to depositors, representing about 75 percent of the federal government's annual budget.

The bank failures have rippled through the economy, fueling inflation and political instability. Government officials say the worst is behind them, but independent analysts counter that they aren't so sure.

More banks are likely to fail, predicts Miguel Octavio, vice president for analysis and investment at Mercados de Capitales, a brokerage firm in Caracas. ``I don't know how banks can rebuild their image,'' he says.

Mr. Octavio says the crisis bears a striking resemblance to the United States savings and loan scandal - but on a larger scale for Venezuela. In the US, government deregulation led to questionable loans, high interest rates on savings accounts, and massive corruption.

Venezuela's problems began in the 1980s with deregulation efforts intended to unleash a free market. Carlos Andres Perez, president at the time, removed the cap on savings account interest in an effort to make Venezuelan banks competitive and keep capital from fleeing overseas.

Banks soon embarked on an interest-rate war. ``Banks made loans at a loss, hoping that inflation would make up the difference,'' Octavio says. Bankers speculated in the stock market with depositors' funds. Top bankers frequently made unsecured loans to friends and relatives.

At first, few people complained because profits soared. Bankers treated themselves to outrageously high salaries, corporate jets, and high-rise headquarters. ``Even middle-level managers would get low-interest loans to buy $500,000 condos,'' Octavio says.

The banking boom temporarily obscured structural problems within the financial system, says Daniel Lahoud, chief analyst with Invest Analysis Company in Caracas. Every major banking group owned a mortgage bank, investment bank, and leasing company, Mr. Lahoud says, so when one bank failed, the other institutions also collapsed. ``We have a very primitive banking system,'' he adds.

Political instability intensified the banks' problems. In February 1992, young military officers attempted to overthrow the government. Banks significantly raised their rates in order to keep money from going abroad.

Then, in the winter of 1993, Lahoud says, the government didn't pay its suppliers, causing a major liquidity crisis for banks. On Jan. 1, a new banking law took effect that required banks to pay for checks on the same day they cleared. Banks that had been surviving by kiting checks faced a liquidity crisis.

On Jan. 4, the government closed Banco Latino, the country's second-largest bank, and its directors were eventually charged with massive corruption. Over the next several months, nine other banks failed and were seized by the government.

The new administration of President Rafael Caldera Rodriguez had to deal with the crisis. It increased depositor guarantees from $1,000 to $10,000 for Banco Latino customers and extended $6.1 billion in guarantees for depositors at all 10 banks.

Government officials say some of that money will be returned as bank assets are sold. ``This was not a giveaway as has been maliciously presented,'' says Ramon Illaramendi, a senior adviser to President Caldera.

But other analysts say most of the money will ultimately be spent, noting that the government hasn't provided any figures on money returned so far. Pumping $6.1 billion into the economy through government guarantees has significantly contributed to the country's estimated 60 percent inflation rate, analyst Lahoud says.

Some opposition political leaders say Caldera has caved in to banking interests and should be taking a much harder line. Instead of getting government guarantees, the banks should be forced to pay depositors with proceeds from foreign and domestic assets, says congressman Pablo Medina, of the opposition Radical Cause party. He says the government is creating a banking monopoly.

``Seven banks now control 70 percent of banking operations in Venezuela,'' Mr. Medina says. ``The government of Caldera is a government of bankers.''

Many business people, however, express confidence in the government's actions. It has taken steps to seriously regulate banks, including requiring 100 percent reserves for loans made without collateral. The Caldera administration is also trying to sell some of the closed banks and is encouraging others to merge.