Nicaragua’s Banks and the Real Estate Bubble

The banks face an unprecedented crisis, triggered by a conflict of human rights, and aggravated by the explosion of the housing bubble

By Jose Velez Morgan  (Confidencial)

HAVANA TIMES – Ravel’s Bolero is a unique piece of music, especially since once you hear it, it’s enough for a lifetime. This piece begins with a soft melody and increases its tone until it becomes an unbearable noise. So have decisions been made in Nicaragua’s financial crisis. The bankers were rising the tone with each decision, responding to the consequences provoked by the human rights conflict.

First, the banks cut credits by invitation, that’s to say they stopped offering them, and those who had accepted were told that conditions had changed. Afterwards, they cancelled those already approved and so on until they reached the point of practically restricting all loans. The flight of capital continued, and they tried to slow it at least with those that had certificates not yet expired. These combined decisions by bankers, investors and savers describes the first phase of the financial crisis.

In that first phase, the banks spent six months without generating income, delivering deposits and honoring certificates, without being able to really recover the loans and incurring in operational costs, which include a payroll of more than 8,000 employees. Informed sources estimate asset losses of US $686 million dollars. The banks have dodged bravely this first phase and to the surprise of many the eight financial institutions are still there.

The rating agencies such as Stanford & Poor and Moody’s have passed the banks to negative watch across the board. Fitch Ratings also assesses similarly the general situation, but stops at two banks in particular: Banco de Finanzas (BDF) and Banco de Fomento de la Produccion (BFP).

The good-natured BDF) is the leader in financing houses and Fitch Ratings supports its outlook indicating that “under certain circumstances, the transfer and convertibility of risks could be increased, which would reduce the ability of the bank to use the support of “Grupo ASSA” in a timely manner, should it ever require it.” A word to the wise is sufficient.

This same agency suggests possible risks facing the BFP, since the funding of this bank comes exclusively from the Government through the Ministry of Finance. The risk lies in that under its licensing law the State will not be a guarantor of the obligations contracted by the bank.

In the second phase of the financial crisis there are two challenges to overcome. The good news is that no one is taken by surprise.

The first challenge is the payment of certificate funds due in November and December. These will total some US $644 million dollars.

The second obstacle is the reorganization of the credit portfolio. The restructuring that hid reality is over. Now it is an obligation of the banks to declare how much is really lost, just as is mandatory to provide with bank assets the total amount of loses. If the damage was only 25% of the total portfolio, a provision of US $1.2 billion dollars is required.

Very few are surprised that in the middle of the banking collapse a new crisis appears, the real estate bubble. By June, all properties had lost 30% of their value. The valuation chamber of Nicaragua determined that month to reduce by that percentage the value of all real estate in the country. In parallel, the Superintendence directed banks to update appraisals of thousands of mortgaged properties.

The closing of this accounting process will quantify the explosion of the bubble. All the banks are affected, since they keep as loan guarantees granted the now devaluated real estate. The banks have two options, request the thousands of debtors to make deposits to compensate the new premiums or to be realistic and automatically issue complementary loans for this purpose. A credit issue of this magnitude is in line with the latest Central Bank reserves reported on September 30.

The rescue of the financial system could be in the order of US $3.5 billion. This would include payment of outstanding certificates, assuming credit losses, and most important, the issuing of compensation funds to mortgage guarantees.

It is unlikely that the Central Bank will lead this rescue to the financial system. It does not seem to have the same reserves that in a transparent way it published a month ago, and tends to focus more on the fiscal stability than monetary stability. The government cannot come to the rescue either, the risks related to financial sanctions, derived from the human rights conflict, have distanced it from access to multinational funds.

The crisis facing the banks in Nicaragua is unprecedented in financial history. It was provoked by a conflict of human rights, aggravated by the explosion of the housing bubble, lacks national institutions that can lead the rescue and, therefore, does not have access to multinational funds either. It is very difficult for the external partners of each bank to calculate how much they can contribute to salvation, without being contaminated by the fallout and even more complicated is to determine how much time is left for the solution to the conflict. Without approximate amounts or expected times, any banker in the world already has their answer.

Private banks still have access to the international financial market, a rescue bonds issue could well find investors. However, the requirement for the timely placement of these securities is the parallel issuance of some slight signal, that this conflict envisions a solution.