The largest risk to Chile's financial system is the fact that available credit will fall drastically due to losses from international banks.
Accordingly, Chilean Central Bank President Jose de Greogorio made comments today that the bank may need to raise interest rates there, again in order to combat the rising inflation.
On 10 January, Chile's Central Bank raised key lending rates to 6.25 per cent, up significantly. This was called necessary in an attempt to improve skyrocketing inflation there. Inflation is at 7.8 per cent for the country.
One of the largest problems for Chile is the loss of money due to investments in subprime lending. Some capital worth 2.5 per cent of Chile's gross domestic product is threatened. This may happen if international banks pull in their reigns and stop lending to emerging markets such as Chile. When this happens, borrowers will face refinancing debts to local lenders and funds will leave the country.
According to the Central Bank's website, banks within Chile, and companies there, own some near $10 billion worth of short-term debt to foreign lenders. Of that, 40 per cent is in a risky position due to investments in subprime lending practices. A drop in these funds may put Chile's financial markets at risk, increase economic problems there and keep investors away, the bank fears.
