The report examines the highlyvulnerable situation of the financial system in Paraguay,which suffered from a banking crisis in 1995-98, in additionto recent competitive devaluations of the Braziliancurrency, the fall in cotton prices, as well as the regionaleconomic slowdown. A major factor obscuring the reality ofbanking system solvency, is the practice of substitutingneeded loan provisions, with collaterals which underlie theloans. The main issue here is the relative liquidityabsence, and delays inherent in unwinding such collateral,as well as its potential over-valuation, making it anineffective substitute for cash provisions. The reportfurther examines banking reforms, and restructuring of thestate-owned banks, institutional and regulatory framework,and the safety net mechanisms and deposit insurancegoverning the system. It is suggested the reform of thepension system is crucial at this juncture, given that thecurrent pay-as-you-go social security public pension system,is not fiscally sustainable from an actuarial, and benefitspayment perspective, and, because the current system, evenat its best, delivers very low returns on pension investmentfunds. Most importantly, for both the public, and privatesystems, the investment regime should permit heavy weightingin foreign hard currency securities.
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