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Cablegate: Update On Chile's Economy: Markets Recover On October 13

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TAGS: ECON EFIN ETRD EINV ECIN PGOV PREL CI

SUBJECT: UPDATE ON CHILE'S ECONOMY: MARKETS RECOVER ON OCTOBER 13

REF: A) SANTIAGO 909 B) SANTIAGO 915

1. SUMMARY: This is the third in a series of reports on major
developments in Chile's economy in the face of recent, global
financial turmoil. On Monday, October 13, there was rebound in
copper, the exchange rate, and the Chilean stock market, following
the trend of international markets. Small- to medium-sized
enterprises are having greater difficulty accessing credit. The
Central Bank announced that only a small percentage of Chilean
banks' liabilities are held outside of Chile. END SUMMARY.

Copper Prices Bounce Back A Little
----------------------------------

2. Copper closed at $2.28/pound, less than a 1% increase on the
price of October 10. Prices may have been affected by an
announcement from BHP Billiton, owner of Chile's Escondida mine (the
largest in the world). The company declared force majeure (release
from contractual obligations) on sales contracts for nine months due
to the failure of one of its mills. Press reports estimated the
failure could reduce Escondida's production of annual refined copper
by 10%.

Chilean Peso Up vs. U.S. Dollar
-------------------------------

3. The Chilean Peso registered its largest one-day appreciation
against the U.S. Dollar in 13 years, closing at almost 618 Chilean
Pesos to 1 U.S. Dollar (a change of more than 20 Pesos, or over 3%,
on the rate of October 10).

Stock Market Rebounds
---------------------

4. The IPSA regained almost 13% of its value from its close on
October 10, in line with stock markets worldwide. The rebound was
led mostly by retail and bank shares. It was the largest one day
increase since the Index was created.

Difficulty Securing Credit For Smaller Companies
--------------------------------------------- ---

5. Press reports indicate Chilean banks are withdrawing lines of
credit to small- to medium-size enterprises. Banks are making new
loans more difficult through higher credit requirements and interest
rates. One company CEO claimed that before the financial crisis,
companies could get a loan for LIBOR + 80 basis points, now the rate
is LIBOR + 800 basis points. The Minister of Economy said October
12 there was no crisis in the private sector and that restricted
access to credit was understandable given the state of global
financial markets.

Central Bank: Chilean Banks' Foreign Debt Is Low
--------------------------------------------- ----

6. Central Bank President De Gregorio said in October 12 remarks to
the press that only 7% of Chilean banks' debt is held by foreign
entities. He underlined that one of the Central Bank's primary
roles is to minimize the effects of the global financial crisis in
Chile. De Gregorio noted that if firms began to hold back on
investment in Chile, the Central Bank would have to factor this into
monetary policy. This might be a hint that the Central Bank is
considering a less contractionary policy.
SIMONS

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