* Government rules out broader market problems
* Colombia expects record foreign investment this year
* Central bank provides extra liquidity to brokerages
By Helen Murphy and Nelson Bocanegra
BOGOTA, Nov 7 Troubled Colombian brokerage Interbolsa will be liquidated and its assets sold to pay investors and other obligations, Finance Minister Mauricio Cardenas said on Wednesday, a move that prompted the central bank to shore up the market with additional cash.
While the government insists it is a one-time case, due to poor management by Interbolsa, rather than representative of any wider liquidity problems in Latin America's No. 4 economy, the central bank said it will ensure cash flow to brokerages and maintain liquidity in the market.
The financial market regulator intervened on Friday after the brokerage failed to make a scheduled 20 billion pesos ($11 million) payment to a local bank.
Interbolsa, the Andean nation's biggest brokerage with about 50,000 clients and one-third of daily operations on the stock market, on Tuesday ceded control of its local bond portfolio to Bancolombia SA.
The speedy decision to liquidate Interbolsa indicates a lack of market confidence in the brokerage, said Cardenas, ruling out broader problems in Colombia's financial markets.
Market players have so far reacted with caution over Interbolsa's woes, agreeing it is probably an isolated case but also staying alert to any signs of a spillover to other financial institutions and contagion from perceived risk.
The market watchdog had previously said it would study Interbolsa's books and make a decision within two months.
"The regulator's move this morning is a strong move - it sends a clear message to the market that whatever they found is not acceptable and on those grounds action needs to be taken immediately," said Rupert Stebbings, managing director of Celfin Capital in Medellin.
"It's a short sharp shock but this is a market that in terms of the financial strength has proven itself to be very resilient during the recent years of global crisis," said Stebbings.
Still, central bank official Hernando Vargas said on Wednesday the monetary authority would provide extra liquidity to brokerages via repurchase agreements backed by corporate debt holdings and "preserve general liquidity in the economy."
The regulator has been keeping an eye on brokerages and their liquidity for the last several weeks, said Gerardo Hernandez, who heads the market watchdog.
The liquidation does not impact Interbolsa's parent company Grupo Interbolsa.
PROTECTING THE MARKET
Cardenas told reporters the liquidation announcement came after Fogafin, a state-run guarantees fund, questioned the "viability" of Interbolsa in a letter to the regulator.
"There is a lack of confidence on the part of agents that provide liquidity to Interbolsa," he said. "This is the best form of protecting the interests of Colombia's financial market."
The government blames Interbolsa's cash flow problems on poor management - which began when it became too dependent on liquidity from repurchase agreements tied to the price of shares - and insists Colombia remains attractive to investors.
Colombia's capital markets have risen steadily over the past several years as a U.S.-backed offensive against Marxist rebels and right-wing paramilitaries made the nation safer for business. Local companies are increasingly going public to tap local resources for investment abroad.
Foreign direct investment this year is expected to reach a record $17 billion, mostly in the oil and mining sectors. In 2002, when many international investors rejected Colombia because of the violence caused by decades of war, the economy attracted just $2 billion.
"I don't think there's any danger to the financial system, but when this sort of thing happens the situation gets bigger simply due to contagion of that concern," said the manager of a financial entity who asked that his name not be used.
Cardenas said investors with shares and other securities managed by Interbolsa will be able to shift them to other brokerages. Interbolsa on Tuesday handed management of 1.6 trillion pesos ($875 million) of local Treasury bonds, known as TES, to Bancolombia, the nation's biggest bank by assets.
The market regulator last took control of an entity in 2011, when it liquidated the Proyectar Valores brokerage over poor management.