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Rodrigo Julio Molina Ortega, Esq.
Offshore services providers and an international law firm MOLINA & CO is well known for its practical, creative and cost-effective approach to legal and financial challenges
Email: rjm@moliasoc.com
www.panamaoffshorecenter.com
A New Economic Order
04 April 2009
By: Rodrigo Julio Molina Ortega
Tips to deal with the world economic crisis
The crisis began in the United States with foreclosures. For many years, the
value of properties had been rising steadily. During this bonanza, requirements
for credit loans were relaxed. In order for banks to lend more, they pooled
together or combined mortgage loans with financial instruments called mortgaged-backed
bonds. These were sold in the financial markets to other banks, pension funds,
insurance companies and investors.
The problem surfaced when property prices ceased to go up and, in some cases,
started to drop. When the value of properties went down, many people realized
that they owed more money to the bank than the value of their property and,
therefore, stopped paying their mortgages. The owners of these debts panicked
and started to sell their bonds, which caused a stampede of bond sales.
These famous bonds are bought and sold as any other product (tomatoes, homes,
cars). Even when backed by mortgages, the law of supply and demand rules over
the value of these bonds, and since supply exceeded demand, their value plummeted.
Now then, the owners of these bonds are obliged to match the value of these
bonds in their accounting records to their value in the market. Having purchased
them at 100 dollars and having to set a much lower value, the difference translates
into a loss that has to be reflected in the profit and loss statement.
The problem grew so much out of proportion that it started to affect the banks
that did not have these Bonds. The growing uncertainty as to the outcome of
the crisis has made banks raise the cost of loans among themselves. They have
lost confidence in each other and have therefore stopped loaning money to each
other. As a result, other financial institutions have gone bankrupt, infected
by the initial problem.
Mistrust rules at world level. As the saying goes “fear makes the wolf
bigger than he is”. And as in many countries faced with any kind of crisis,
the “just in case” position can blow any crisis out of proportion.
This is basically what is happening. The fear of many investors is making the
crisis spread like a global virus.
Governments all over the world are taking action to halt the economic downturn
and to reassure people as well as companies. First and foremost, the main concern
is to reassure people that their savings are safe in case their bank files for
bankruptcy. World governments are reassuring people by guaranteeing bank deposits
or, as in other countries, by increasing the amount of the insurance on bank
deposits (US$250,000.00). This is done to prevent people like us from withdrawing
all of their money from the bank and keeping it under the mattress!
WHAT CAN WE DO?
1. Protect your job. This not only implies having the right attitude when going
to work but also ensuring the company’s continuity. Be more efficient,
don’t waste time surfing on the net. Strive for excellence.
2. Cut back on personal expenses. It is important to review your personal expenditures.
Keep it simple and be frugal. Try not to spend on things you really don’t
need.
3. Save as much as possible. This has become even more important due to the
uncertainty we are currently experiencing.
4. Keep your money in the bank. Keeping your money under the mattress, with
a friend or in some savings bank does not afford any guarantees.
Reduce your debts as much as possible, especially those having a variable interest
rate. I’m referring to personal credit cards. Interest rates are going
to increase.
The faster you can pay off these credit cards and personal debts, the better.
Interest rates will go up. Don’t pay the minimum shown in your statement.
Review the interest rates that you are paying on your debts
Understand the difference between using a credit card and becoming indebted
with a credit card. The first case entails using the credit card and paying
off the balance at the end of the month. The second case consists in using the
credit given by the bank or the store. There is no cost involved in the first
case, whereas the second case involves the payment of interest.
Credit card and store cards are a huge temptation. Don’t take out any
new ones and, if possible, pay off some of them. You will be able to take out
new ones in the future.
The contrary is true for mortgages at fixed rates. At this time it is better
not to make any advanced or higher payments, but to save the money.
DO pay your house on time. This is your most important asset.
DON’T give into those “no-interest months” promotions. I
worry about this form of marketing used by many stores to sell more. People
don’t “feel” the bill immediately so they are more inclined
to buy.
The only way not to have to pay interest is by paying off the balance shown
in your credit card statement each month. Few people do this and banks make
a lot of money this way. If you don’t realize that buying items this way
is equal to having the amount of the monthly fee taken out of your salary during
those months, it will cost you interest.
Be careful about lending to other people. It is quite common for friends or
relatives to ask you to loan them money. If they do, ask for some kind of warranty.
This person could be drowning and could take you down with him/her if you are
not careful.
Stay Healthy. Getting sick costs money. Go on a diet, lose weight, exercise,
lower cigarette and alcohol consumption.
Talk to your family about this. It is important for your spouse and your children
to understand this.
In our companies, we ALL need to do the following:
- Take care of clients. We need to focus on good service and that goes from
good customer care to taking care of their money (save them unnecessary storage,
take care of merchandise, be sure to return any balance in their favor, etc.)
- Collect money faster. Payroll is paid from what is collected.
- Finance less. Those of us who have commitments and obligations can’t
afford not to meet them, but let’s try not to contract new ones for
now.
Reduce expenses as much as possible:
- Telephone, power, stationery
- Trips
- Study thoroughly any investment.
- Protect the company’s assets (cars, photocopy machines, computers,
etc.)
- Sell more. Let’s invest in acquiring new clients and in selling more
to those we have already.
Conclusions
It is uncertain how long the world crisis will last. What is important is to
first understand why it happened and then to learn the lesson. Also, don’t
allow scaremongers to affect you and your decisions, be they journalists or
people close to you.
We need to take steps, both personally and company wise, to preserve and guarantee
the continuity of our source of income.
If the American government is going to buy all the toxic assets from banks,
one must logically infer that Panamanian realtors must be wise enough and lower
the square meter of all empty apartments in order to sell them as quickly as
possible and not be affected by the position assumed by the G20. Jurisdictions
that have committed to the internationally agreed taxstandard, but not yet substantially
implemented (grey)
Martinelli: “We must make it very clear to the G20 that we are not a
tax haven. Presidential candidate Ricardo Martinelli said yesterday during a
trip to Veraguas that Panama must set the record straight at the G20 Summit
of April 2nd in London and insist that this is No fiscal paradise. He affirmed
that the government and entrepreneurial associations agreed to send a message
rejecting Panama’s inclusion in that list, which could be detrimental
to our economy. As an example of the controls that currently exist, he said:
“Bank formalities to open a savings account are never-ending”.
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