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Davies defends FINSAC debt

Finance minister, Dr Omar Davies, said Tuesday that the total price tag to date for the rehabilitation of the financial sector was $95 billion, but that the final bill to taxpayers would likely be less than half that amount.

Davies, in his first public utterance on the accounts of FINSAC since his April budget presentation, said just about $41 billion of the debt owed by FINSAC would eventually be borne by the budget, but gave no details on how it would be written down.

The estimate provided by Davies falls short of the over $100 billion that private sector analysts have placed on the bailout bill, when the carrying cost of the debt is accounted for.

To date FINSAC, has issued $62.6 billion in bonds to wobbly banks, building societies and insurance companies in exchange for their bad loan portfolios, and to paper over capital deficiencies on their books. Of that amount, the agency set up in 1997 at the height of the crisis in the financial sector, expects to recover $22 billion from the sale of assets, leaving the remaining $41 billion to be funded from general revenues.

"That is the cost to taxpayers. The question is, how can we pay that debt off that was incurred on behalf of all Jamaica," Davies said at Monday night's launch of Union Bank, the bank formed from the consolidation of four banks acquired by government.

A further $32.5 billion - $22.5 billion from the Bank of Jamaica and $10 billion from the Ministry of Finance - in cash advanced to the sector, makes up the $95-billion bailout.

The price tag as revealed on Monday was $15 billion more than the $80 billion that Davies had put on the rescue operation a year ago when he first made public the cost of government's intervention in the sector.

The ballooning bill largely represents growing interest payments by the agency on its outstanding pile of bonds as well as continuing support to some financial institutions. FINSAC routinely issues more bonds to cover interest accruing on its paper, to manage its limited cash flow from the sale of assets and just under $8 billion Davies gave the agency in his April budget.

But the finance minister again defended the government's decision to guarantee deposits and take over failing banks.

"What would be the chaos with which we'd be dealing with if this had not taken place? What would be the alternative', Davies asked rhetorically at the function that also renamed the former Citizens Bank headquarters at 17 Dominica Drive, Union Bank Centre.

Union Bank was formed out of the merger of Workers, Citizens, Island Victoria and Eagle, the major casualties of the financial sector fallout that began with the collapse of Century National Bank in July 1996.

The four indigenous commercial banks were acquired by government through FINSAC, but after running all four as separate entities, the administration decided to consolidate their operations hoping to chop costs and create a larger and more efficient bank that would be more attractive for private sector investors.

After laying off dozens of staff and reducing the branch network to 20, many of the bank's key indicators were headed in the right direction, according to Union Bank chairman, Dennis Morrison. Deposits were up 7.1 per cent between June and September; staff costs reduced 26 per cent and other administrative costs by 30 per cent. The bank also had an injection of $2.8 billion in new capital, which would be mainly FINSAC bonds.

 November 10, 1999

 

 

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