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Fitch: Impact of Bancafe Intervention on Guatemala's Creditworthiness.

NEW YORK -- Fitch Ratings has published a special report titled 'Intervention of Banco del Cafe (Bancafe)' which analyzes key factors that could affect the Republic of Guatemala's creditworthiness.

The recent intervention and planned liquidation of Bancafe, Guatemala's fourth largest bank, is not likely to put the sovereign's credit ratings in jeopardy at this time given the authorities' prompt actions. However, going forward Fitch will monitor any broader impact on the banking system that could affect the sovereign's creditworthiness. Since the authorities have transferred Bancafe's deposits to three local banks, deposit flight has been muted and mostly reflected a transfer of deposits to other banks within Guatemala. As such, Fitch's base case scenario does not foresee this bank intervention contributing to a broader systemic crisis at this time. Nevertheless, Fitch will be closely monitoring the performance of Guatemala's financial sector, particularly with respect to signs of deposit flight abroad, creditor runs and/or liquidity pressures. The rapid and efficient implementation of the banking regulator's strategy to liquidate the institution will also be important for maintaining confidence.

Although the economic cost of Bancafe's intervention to the economy in terms of contributing to potential macroeconomic instability and foregone growth would be difficult to estimate, the net cost to the public sector should be relatively low in terms of GDP as the government does not intend to recapitalize the bank or assume any obligations of the trust formed to liquidate Bancafe's assets. Additionally, outlays for liquidity support and payout of guarantees on deposits has been muted thus far. However, if the authorities change their strategy and assume the obligations of the trust, the ultimate fiscal cost will be determined by the level of recoveries achieved and the degree to which the authorities lean on private commercial banks to recapitalize FOPA. Bancafe's total deposits only accounted for about 2.4% of estimated 2006 GDP, while available liquid resources accounted for about 0.9% of GDP at the time of intervention.

The Outlook on Guatemala's ratings is Stable. Economic and financial pressures that could arise due to the recent intervention and planned liquidation of Bancafe appear contained due to the superintendency of bank's prompt actions, the government's favorable balance sheet and steady improvement in economic fundamentals. Conversely, an unfavourable resolution of the Bancafe situation and/or unforeseen problems with other off-shore entities could pressure creditworthiness going forward.

A copy of the special report on Guatemala will be available shortly on Fitch's website

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
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Publication:Business Wire
Date:Nov 9, 2006
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