The news of the week about the bankruptcy of the Silicon Valley Bank makes us consider the economic repercussions that it will have in the world, especially in Latin America .
Photo: Tony Webster
LatinAmerican Post | Santiago Gómez Hernández
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Leer en español: Silicon Valley Bank en quiebra. Así se sentirá en Latinoamérica
One of the biggest banks in the Mecca of technology, Silicon Valley Bank, went bankrupt. This may not only have repercussions for the world of technology and start-ups, but it is also feared that it will hit the US economy. But this could not only impact the giant of the north, but also spread throughout the world, especially in Latin America.
What Happened to the Bank of Silicon Valley?
On Friday, March 10, Silicon Valley Bank collapsed after failing to raise capital. In this way, Californian laws force the US Federal Deposit Insurance Corporation to take control of the financial institution, causing anxiety in the financial and technological industries, and, therefore, throughout the country and the world. The fear is that the public will withdraw their money from more banks and could end up creating a crisis similar to the one experienced in 2008.
This began on Wednesday the 8th, when the SVB bank announced that due to a liquidity problem it would try to collect 2.25 billion dollars in the sale of shares in order to have capital. The situation caused panic within the stock market and its clients, which caused the shares to plummet, so much so that they had to block them and give up their attempt to capitalize. So much was the panic that other banks, such as PacWst Bancorp or First Republic, also had to block transactions of their shares for Friday.
One of the main causes is that, with low interest rates, many startups in California took out loans and deposited the money in banks (one of these, the SVB). But in the face of world inflation, rates have increased, and today credit is not a viable source of money and this has caused many customers to withdraw their money from the bank. This has generated a serious liquidity problem. Due to high interest rates (this is how the government tries to combat inflation caused by the conflict in Ukraine), the only way the bank found to get cash flow was to capitalize shares. This did not happen and, on the contrary, generated uncertainty among savers and intensified the issue.
Now, the FDIC will begin to sell and liquidate the bank in order to pay its customers and creditors . Which is a great fear about the banking system. This demonstrates a clear difference to the approach of the federal government: it no longer enters to rescue banks, but to rescue clients.
A Flashback to 2007-2008
The possible financial crisis in the financial system in California brings back bad memories for the banking system. Between 2007 and 2008, there was a financial crisis due to mortgages. This was due to the abundance of sub-prime mortgages and a run on badly backed loans. This crisis ended up affecting several countries, especially Europe, generating a real estate bubble in Spain. This is why the bankruptcy of Silicon Valley Bank generates fear and concern about its possible blows on the international scene.
However, many analysts consider that the rapid intervention of the FED may be a point in favor so that a domino effect is not generated.
Repercussions in Latin America
Firstly, Silicon Valley Bank was an important source of financing for startups, not only in the United States, but for many in Latin America. The possible immediate consequence is due to the tightening of credit conditions that are now being generated in the United States. Countries that have a reliable source of investment and capital in the North American giant will be the most affected.
According to Kimberley Sperrfechter of Capital Economics, in dialogue with BNamericas , "Colombia, and to a lesser extent Chile, stand out in this regard. Given Mexico's close ties to the US, the Mexican peso would likely also be affected in such a scenario." This is why the measures taken by those countries that, especially, have a close investment link with the US, will also be vital. The fall in national currencies is not ruled out and could worsen the situation.