Financial speculation and economic development of Peru

The ideology of ultra-liberalism is making the dream of the libertarians who advocated the disappearance of the State come true. Indeed: the market is destroying the State. Ignacio Ramonet

1. Introduction

The Financial System from a perspective of economic competitiveness is of crucial importance for the provision of resources to productive companies in an efficient way, as it is an attractive recipient of direct foreign investment flows for productive development and provider of efficient infrastructure services for facilitation. of foreign trade.

We understand competitiveness as the capacity that a society has to increase its levels of well-being, consequently the quality of life of its inhabitants and face the challenge of competition in a globalized economy. Therefore, it is imperative to implement global control mechanisms for financial traffic.

2. History of the financial system

We will try to describe the genesis of the financial system in light of a tight history. In AD 1,368 - 1,399, convertible paper money appeared, first in China and then in medieval Europe, where it was widely used by goldsmiths and their clients. Being valuable gold, goldsmiths kept it safely in safes. Because these safes were large, goldsmiths rented to artisans and other spaces to store their gold; in return they were issued a receipt that gave the depositor the right to claim it at sight. These receipts began to circulate as a means of payment to buy property or other merchandise, whose backing was the gold deposited in the goldsmith's safe. In this process the goldsmith realized that his safe was full of gold in custody and the brilliant idea was born,to provide people with "gold deposit receipts", charging interest for their services; the gold would remain in custody and only delivered a paper in which the amount loaned was noted; taking as a precaution not to issue receipts that exceed their backup capacity. He realized that by intermediating between artisans who had the ability to save gold and those who needed it, he could earn a lot of money. This is the way in which the current capital market was born, based on a very simple financial system, of an intermediary nature.He realized that by intermediating between artisans who had the ability to save gold and those who needed it, he could earn a lot of money. This is the way in which the current capital market was born, based on a very simple financial system, of an intermediary nature.He realized that by intermediating between artisans who had the ability to save gold and those who needed it, he could earn a lot of money. This is the way in which the current capital market was born, based on a very simple financial system, of an intermediary nature.

The evolution of the capital market and the technological development of humanity involve the use of terms such as "globalization", "insertion in the world economy", "economic freedom"; concepts that are incomprehensible to the majority of the poor.

3. Is the behavior of the capital market an ethical or financial speculation problem?

We will first describe the scenario of the world of finance. In all countries there are basically two markets: the first is the one for products and services, offered by different people and companies in the country; the second is the capital market, where surplus capital is traded.

In the capital market we distinguish three main agents of the economy: government, companies and families that come to invest their resources or to obtain financing.

There are mainly two ways to transfer resources from savings to investment: the first is through intermediation, by the financial system, and the second is through the transfer of securities, management assumed by the stock market.

Being necessary to conceptualize the subject, let us remember Francisco Umpiérrez Sánchez, who gives us the following definition: “The financial market is the world of banks, credits, mortgages, promissory notes, current accounts, etc. It is also the world of the stock market, of stocks, of public debt and in general of securities. And it is also the world of savers and investors, of financial oligarchies and of sudden and disproportionate enrichment. It is, finally, the world of money and interest… ”.

At the same time, we went to the dictionary of the Royal Academy, to define ethics as: "… the set of moral norms that govern human conduct"; In light of this definition and with real cases we will try to decipher the behavior of the owners and executives of the global financial system.

Second, we cite some cases of financial trafficking, with which we rehearse answers to the question asked.

In the first work cited, the manipulations of the junk bond market1 in the 1980s are exposed, by Dennis Levine, Martín Siegel, Iván Boesky, Michael Milken and others; At the time classified as the largest criminal conspiracy in the world of finance. Drexel Burnham Lambert, EF Hutton, Salomon Brothers, Merryll Linch… are some of the controversial names of that time; Also noteworthy is the well-known BCCI bank case, closed by court order in sixty-two countries in July 1991.

In the second, the following cases are exposed: the 233-year-old English bank Barings PLC, bankrupt due to speculation on the Japanese stock market, through the futures market; in Singapore Barings lost $ 1.3 billion in derivatives trading; this loss wiped out the entire share capital of the company and had to close on February 26, 1995. In 2001, ENRON, the world's leading energy company, saw its share price drop from $ 90 to less than $ 0.24, in just over a year; More than $ 30 billion of the company's stock went missing on Wall Street.

Finally, in 2002 we learned about the case of WorldCom Inc., the second long distance telephone company in the United States; WorldCom bond investors lost more than $ 7.3 billion overnight; promissory notes and bonds slumped to 14 cents on the dollar of their face value, previously priced at 78 cents. These bonds had a total value of US $ 28,000 million and are now worth approximately US $ 4,200 million.

To all this we add the case of unscrupulous rulers and public officials, who plundering the economies of their countries amass enormous fortunes and deposit them without any control in the global financial system, generator of the so-called "financial paradises".

The modality of the current financial management coupled with the absence of ethical principles on the part of people and institutions, make common and current both those cases of scandalous questioning, and those that, because they are smaller amounts, cease to be daily news.

By way of conclusion we will say: they are routine cases in the capital market. In the current world economic order, these cases are not strange or surprising, they are inherent in the globalized capital market; It is not simply the ethical behavior of executives, it is the speculative model.

Executives act on orders and operate naturally in settings where speculation is the main ingredient. All the cases cited have something in common, financial policy is speculation and morality underlies the supreme objective, which is "income" at any price.

Consequently, the current global financial order with its unethical spirit, due to its decisive influence on the economic life of the countries and fundamentally in the underdeveloped countries, prevents economic development due to its speculative nature. Given this reality, the global implementation of control mechanisms is urgent to avoid speculation, resource trafficking and usurious rates.

4. Risk component

The risk (one of the three components of the interest rate), or degree of variability and contingency for the return of an investment, is arbitrarily manipulated. Risk is a subjective element, based on the premise that will you pay or not pay? For example, in Peru, if one of the companies in the conglomerate - read owners - of a bank, requests a loan via telephone, it is granted immediately, without further formalities at an annual rate of 9%.

Whereas if the applicant for the loan (for a much smaller motorcycle) is an independent businessman, located in an area of high population density or popular, the bank requires you to comply with all the requirements and supporting documents for personal assets and your business assets.. What's more, it cuts the amount requested as a loan and charges an annual TEA of 69.59% on average. What has happened ?, the bank assumes that the conglomerate company has zero risk and operating costs, while the small businessman represents high risks and for the same reason adds higher operating costs.

Lenders and financial transnationals, as part of speculation, created the so-called "country risk" (difference in the yield on a country's bonds and the rate of return on US treasury bonds), a unilateral measure imposed to the majority of Latin American countries (Argentina, Brazil, Colombia, Ecuador, Mexico, Panama, Peru and Venezuela) and some of Eastern Europe and Africa (Bulgaria, South Korea, Morocco, Nigeria, the Philippines, Poland and Russia.).

The risk implies the possibility that the creditor may pay with permanent delay or simply not pay; but in the case of a creditor who has punctually paid his obligations, the dreaded risk has not occurred and consequently the equivalent of the risk rate paid should be compensated or reimbursed considering the value of money over time.

5. Peruvian financial system

A company or industry (large, medium, small or microenterprise) is competitive when it is able to adequately face competition in the markets, for which the financial resources must come with rates and deadlines for productive development. In reality this is not so. The global financial system reflected in Latin America and in Peru, acts speculatively. Credit granting in Peru is based on individual evaluation, credit recovery, visits to the client's family and / or economic unit; evaluating the set of its properties, income and expenses. Denounce the application of a policy that promotes the financing of productive projects; privileging the patrimony of the borrower but not the project associated with the line of credit.

Periodic rates fluctuate from 2.2% to 4.5% monthly; that is, effective annual rates (TEA) of 28.94% and 69.59% respectively. In the case of credit cards of supermarkets and large commercial stores that operate associated with a Bank, the rate is 5.5% monthly, that is, a TEA of 90.12% that rises to more than 105%, with fictitious insurance, leonine carriage and blackberry for a day's delay in payments.

Imagine now, the following scenario, the bank places 1,000 million monetary units, in the hands of a good number of borrowers at an annual rate of 54% (in Peru this is a real market rate) payable in 12 months; the risk component of this rate is of the order of 30%. Analyzing the total lent as a single payment, we have that the interest made up of one billion is 695,881,400 of monetary units and of this amount 30% corresponds to the risk component, that is, 208,764,420 of monetary units. Let's also imagine that the debtors pay the loan at 100%, without delays; Given this responsible attitude of the debtors, what does the bank do? He stays with 208'764,420.

5.1. Changes in the Peruvian financial system

The 90s mark the beginning of changes in the Peruvian financial system, "liberalizing" it; the Central Reserve Bank (BCR) is stripped of its regulatory function of the nominal rate, considering that the interest rate is adjusted by "the market". Public service companies such as telephony and electricity, among many others, are privatized at undervalued prices. Between 1997-1998 the Asian and Russian crises produced devastating effects in economies with a high degree of financial speculation (eg Argentina); in addition to the "current of the child". In 1999, the devaluation in Brazil and the privatization of the Peruvian pension system took place with the help of the World Bank, giving birth to the pension fund administrators - AFP.

The consequences of these “changes” were: Increase in foreign investment through participations in existing institutions and in new banks; excessive growth of the bank SPREAD3, due to the perception of high risk between 1997 and 2001; abuse of the risk component of the interest rate; free market practices as support for non-regulation and control; Multiple and Consumer Banking without an ethical base, interest rates at usurious levels; organized crisis for the liquidation of state banks and savings and credit promotion mutuals, deep crisis and collapse of savings and credit cooperatives, thus eliminating social institutions with greater access to microcredit and microfinance.

From the nineties –as already explained-, new banks with strategies for placing money in the workers market enter Peru, operating massively with consumer credit (placing cash or intermediating between affiliated stores and consumers). The rates of these banks in the "free market", initially exceeded 100% of TEA, with late payments and excessive penalties for late payment of hours and days.

On the subject it is necessary to specify that the Peruvian financial system is made up of: 14 Banks, 6 Financial, 12 Rural Savings and Credit Banks, 14 Municipal Savings and Credit Banks, 7 Financial Leasing Companies, 14 EDPYMES, 4 AFP Collective Fund Administrators, 17 Insurance Companies and 4 Savings Banks and Spills. These institutions operate with high interest rates, which impede the economic development of the country; Banking interest rate SPREAD remains unchanged and remains higher than in many neighboring countries. Peru is one of the countries - proportionally - with the largest foreign presence in its financial sector.

Since the 90s, the "big businessmen" and officials in the economy sector talk about "great successes" in the economic sphere. An elementary reasoning teaches that every change must be translated into results, in our case the results are obvious: in essence we are still the country of the 90s; Peru is a great fair of shops and supermarkets, slot machines, casinos, hostels, street vendors and taxi drivers with professional titles. The much-touted foreign investment of the last 15 years is located in primary and tertiary sectors such as mining, retail chain stores and telecommunications.

Likewise, the current GDP growth of 4% and the positive trade balance do not benefit the majority of Peruvians; The gap between rich and poor grows, it does not decrease. The intellectual middle class has been economically displaced to subsistence levels, the poor exceed 54% and the extremely poor (below the poverty line) exceed 20% of the total population. The result is the same as always the rich are getting richer and the poor are getting poorer.

5.2. Peruvian labor market

To illustrate the Peruvian labor market, to which financial institutions direct their consumer credit products and in which the AFPs operate, we will use the data from the document “Preparation of Statistics on Micro and Small Enterprises” by the economist Cecilia Lévano Rossi. The economically active population (PEA) projected to 2005 is 12'070,072, coinciding with what was projected by INEI in 2005, 12'000,139. From this universe, non-official Peru corresponds to small businesses 7.2%, micro-businesses 52.6%, qualified independent 1.4%, urban independent unskilled 14.2%, rural independent unskilled 5.3% and domestic workers 3.4%; consequently unofficial Peru represents 84% (10'138,860) of workers. Comparatively, the “official” Peru constituted by the large company corresponds to 4.9%,because it only employs 591,302 (they are those workers who have the consumption capacity in large stores). 3.2% (873,687) of workers correspond to the medium-sized company.

Finally, the State covers 7.8% (940,261) of workers. The bulk of Peruvians from Peru, unofficial, 84% of the EAP, subsist on the poverty line, with average incomes equal to or less than the minimum vital income of approximately 130 dollars per month (S /. 460).

6. Conclusions

1. Financial corporations have become the pinnacle of planetary economic activity.

2. Financial speculation is technically opposed to economic development aimed at raising the quality of life for the majority of a country's citizens.

I agree with Francisco Umpiérrez Sánchez, in that the right of the poor cannot be defended if at the same time we do not reveal the voracity of the financial oligarchies that appropriate huge amounts of other people's work.

3. Country risk, is a subjective element, orients investments to speculative activities.

4. The modern terms referred to in numeral (2), have an ideological character, whose implementation does not correspond to the form or living conditions of the majority of inhabitants of poor countries.

Speculative bond, junk bond or junk bonds. In US financial parlance, a fixed-income, high-yield title issued by companies whose creditworthiness is not first-class. Speculation is the commercial operation that is carried out with merchandise, securities or public effects, with the aim of obtaining profit. An interest rate spread is the difference between the passive rate (the rate that banks pay for deposits to savers) and the active rate (that banks charge for loans or loans). To understand more easily we explain how the bank obtains the active rate, all we will do is subtract the passive rate and we will obtain the Spread.

Bibliography c «Bibliographic references« tc «»

Aching Guzmán César. (2004). Financial Mathematics for Business Decision Making. Prociencia y Cultura SA - Peru Microsoft Reference Library, Encarta 2003. © 1993-2002 Microsoft Corporation. White T. Leland and Tarquin J. Anthony. (1999). Economic Engineering - IV Edition. Editora Emma Ariza H. - Colombia Moore JH (1972). Financial Mathematics Manual. UTEHA - MéxicoPareja Velez, Ignacio. (2005). Investment Decisions. Available at Decisiones / book_on_line / content.htmlParkin Michael. (nineteen ninety five). Macroeconomy. Addison - Wesley Iberoamericana SA Wilmington, Delaware, EUAParkin Michael. (nineteen ninety five). Microeconomics. Addison - Wesley Iberoamericana SA Wilmington, Delaware, USAabino Carlos, (2005). Dictionary of Economics and Finance. Available at http://www.eumed.net/cursecon/dic/Van Horne, James C. (1995).Financial administration. Tenth Edition. Editorial Prentice Hall, Mexico

URL references

www.worldbank.org/depweb/beyond/beyondsp/glossary.html

www.ujaen.es/huesped/xiiconfe/

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