A new development bank for South America, called Banco del Sur (BDS), could render the Inter-American Development Bank (IDB) redundant, according to experts.
Venezuela’s president, Hugo Chávez, is spearheading efforts to set up the new bank, as an alternative to Washington-based multilaterals, including the International Monetary Fund (IMF), the World Bank, and the IDB.
His government has committed seed capital of $1.4bn to the bank, expected to start operating in June. Néstor Kirchner, Argentina’s president, is firmly behind the initiative, and Brazil has now indicated it will join it (after rejecting the idea last year on the grounds that it would be “bureaucratic”). Paraguay, Ecuador and Bolivia are also on board and Nicaragua is being sounded out.
Peter Hakim, president of Washington-based think-tank the InterAmerican Dialogue, says: “If the new bank is able to throw a lot of money around the region, I think a lot of Latin American countries will ask what is the point of going to the IDB? Countries are likely to be granted loans more quickly by the new bank than by the IDB because its requirements – for example, relating to the environment – would probably be less rigorous.
“The IDB needs to grant a certain level of loans to earn the interest for its administrative costs. It has been suffering, anyway, because Latin American countries have been borrowing less and have more capital available from private sources.”
Not so easy
Brazilian treasury minister Guido Mantega said at a press conference: “It is not easy to set up a multilateral bank. We have to work out what we will do with those that already exist: the Andean Development Corporation (CAF) and the Financial Fund for the Development of the River Plate Basin (Fonplata).”
He says he would prefer BDS to be based on the reform of one of these institutions. CAF has assets of $10.48bn while Fonplata – whose member states are Argentina, Brazil, Bolivia, Paraguay and Uruguay – only has assets of $409m. Meanwhile, BDS’s initial capital is expected to be $7bn.
“It would be easier to use Fonplata but the problem is that it is very small and there could be legal issues. In the case of CAF, Brazil and Argentina are more removed from the control of its capital, but this could change if the controlling countries were willing to do so,” Mr Mantega added, referring to Venezuela, Colombia, Ecuador, Peru and Bolivia.
Spain and nine Latin American and Caribbean countries are also members of CAF.
Dr Claudio Loser, former head of the western hemisphere at the IMF, says: “I believe Banco del Sur is absolutely unnecessary. It’s a political initiative. Already there are a number of institutions in the continent that provide finance in a professional way and at reasonable interest rates.”
Dr Martín Redrado, governor of the Argentine Central Bank, says: “It depends what you want to achieve by the bank; what its objectives will be. If the idea is to build guarantees to external shocks, then we should look at some sort of reserve pooling, what our colleagues, the Asian central banks, have done. So far, it’s more talk in the press than anything else.
“No one from this central bank is yet a member of the working group. I would be consulted if reserves were to be taken. I don’t see it happening soon. What are the bank’s goals? What are the current financial institutions? What are their shortfalls? That should be the question in hand.”
Asian model
Dr Redrado says Asia’s Chiang Mai Initiative, where central banks undertake reserve swaps, could be a model for Latin America.
It is understood that Venezuela would like Argentina to contribute 10% of its US dollar reserves to BDS. Negotiations are also under way about where the new bank would be headquartered (CAF is based in Caracas while Fonplata is headquartered in Santa Cruz, Bolivia). Venezuela may agree to base it in Brasilia or to appoint a Brazilian as its president, to win Brazilian backing for the project.
US treasury secretary Henry Paulson said at a press conference: “In many ways, the IDB is the regional bank for this area. If the question is, really, where IDB should be headquartered, then maybe that is something that should be open for discussion.”
Luis Alberto Moreno, president of the IDB, says: “It seems to me that this is a sovereign decision for the countries that wish to be part of [BDS]. For Latin America, the important thing is to have alternatives. For ourselves, this means being more competitive, every day granting loans – whose significance is not so much their size but their quality – which really have an impact on development.”
