Oct 2008 Financial News

BOJ US$300m defence fund brings stability

Oct 22, 2008

The defence fund, which the Bank of Jamaica has set up for financial institutions, have created some stability in the market, and has caused foreign brokers to back off on the margin calls that was eating away at local credit, according to central bank governor Derick Latibeaudiere. But no Jamaican institution has actually tapped the lending facility, which ratings agency Standard & Poor's (S&P) revealed as a US$300 million fund (J$21.7 billion) in its most recent review of the country's creditworthiness.

Analysing loan agreements
"Nobody has really accessed it as yet," said Latibeaudiere. "They're looking at the loan agreements." The central bank governor, however, said the Bank of Jamaica (BOJ) had sold foreign exchange "directly" to meet the margin calls. Essentially, the central bank's lending window for institutions facing margin calls on accounts held with foreign brokers, were they to require short-term credit, has provided sufficient assurance that domestic firms had sufficient backing to cover their obligations. "The fund has created some stability," said Latibeaudiere. "They have backed off somewhat."

Percentage on bonds
Jamaican institutions are estimated to hold upwards of 60 per cent of the bond's issued abroad by the island's government and the country's history of meeting its debt obligations had initially caused institutions here to feel safe with their portfolios of GOJ instruments when markets fell under pressure in the face of the global credit crisis. Indeed, institutions themselves and regulators had said that Jamaican firms were unlikely to be materially affected by the collapse of a number of major Wall Street investment banks as well as other American thrifts. However, institutions and officials here became jittery as overseas bolted from emerging market instruments, leading to a tumble in Jamaican bond prices. Jamaican institutions which had used these bonds as collateral for their purchase faced margin calls or were being called on to fulfil repo agreements, pushing up demand for foreign exchange, placing pressure on an already tight market.

Opening lending window
In an effort to head off a crisis, the central bank, a week ago announced it was opening the lending window, but did not say how much cash would be made available or for how long, despite calls by this newspaper for greater transparency. The facility is strictly intended to provide liquidity to these institutions for overseas margin and repo payments on GOJ global bonds during this period of dysfunctional money markets," the BOJ said at the time. The aim, it said, was to ensure stability in the bond prices and "minimise pressures in the domestic foreign exchange market". In yesterday's statement, S&P said Jamaica's financial sector was indeed "dealing with lower availability of credit lines from foreign banks" notwithstanding the "margin calls stemming from the the deterioration in government bond prices".


Source:
The Jamaica Gleaner
Wednesday October 22, 2008
http://www.jamaica-gleaner.com/gleaner/20081022/business/business2.html