Several factors contributed to the deterioration of the macroeconomic environment in 1982. External interest rates rose, the availability of external credit decreased, and terms of trade worsened in the wake of the escalation of oil prices. This put enormous pressure on the Chilean peso—which had been under a fixed exchange rate scheme since 1979—. This regime broke down dramatically and spread to almost all business sectors, given large FX exposures, and heavily leveraged financial conglomerates. All these factors interacted with one another to become an outright banking crisis. But, whatever the causes of the crisis, unsustainable debt was mostly explained by internal vulnerabilities: inappropriate regulation, weak supervision, and lack of attention to excessive credit growth, leveraged on a fixed exchange rate scheme. Although the first aid took the form of “emergency loans” by the Central Bank to commercial banks, during the following year conditions deteriorated rapidly enough to lead to the intervention of 11 banking institutions. Another 8 were added in 1983, including the two largest banks in the system. In all, the intervened institutions represented 60% of total credit. All directors and executives of these institutions were, removed from their posts, and replaced by provisional administrators. Measures to fight the crisis aimed at the liquidation of non-viable banking entities, improvement of balance sheets of viable entities through the purchase of deteriorated portfolios, and the reduction of financial burden of bank borrowers through debt reprogramming and preferential exchange rates. In 1985, this extended to the recapitalization of the intervened banks, through the so-called “popular capitalism” program.
Moreover, mortgage delinquency rates, even in the most serious category, have started to fall, and data that tracks changes in the proportion of borrowers who are delinquent and then become current versus becoming even more delinquent is encouraging (Charts 9 and 10). Finally, the less serious delinquencies for credit card, auto and student loans have been trending lower, though not the more serious delinquencies (Chart 11). Of course, these recent improvements have come in the context of the stabilization in unemployment and house prices. To ensure that the more favorable trends in household balance sheets continue, the economic environment needs to become more supportive. We should recognize that there is still considerable uncertainty about the level of the saving rate and configuration of household balance sheets that will prevail in the coming years. It is possible that households now perceive the world to be a riskier place than they did before and will want to have more “rainy day” funds. More saving may also be needed to meet higher downpayment requirements for home purchases. Thus, while we may be far along in the adjustment process, it is difficult to judge just how much further we have to go. Turning now to the issue of credit availability, there is no question that credit conditions are still tight.