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AmericasJune 3 2009

Winners and Losers in LATAM

Nick Rischbieth, president of the Central American Bank for Economic IntegrationSome of the multilateral development banks in the Latin Americas region are proving stellar sources of funding at this time of crisis, although others are lagging behind with depleted reserves. Writer Jane Monahan
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Winners and Losers in LATAM

Multilateral development banks (MDBs) are in a stronger position than others to respond to the crisis. Leading the group, the World Bank successfully completed a $42bn fund raising among its 185 member countries in 2007; and the Corporación Andina de Fomento (CAF) - whose full members, the governments of Bolivia, Colombia, Ecuador, Peru and Venezuela, have 87% of the bank's shares - successfully doubled its authorised capital to $10bn in 2007. On the other hand, the Caribbean Development Bank (CDB), the Central American Bank for Economic Integration (CABEI) and the Inter-American Development Bank (IADB) are all examining the possibility of a capital increase.

Nick Rischbieth, president of the CABEI, says he would like to increase its capital by 150% to $5bn. But, he adds, because it is difficult, in the midst of a global downturn, to raise funds from the bank's permanent shareholders (Guatemala, El Salvador, Honduras, Nicaragua and Costa Rica) and even from the bank's non-regional members (which include Argentina, Mexico and Colombia), he wants to find new shareholders. "There are a number of countries that have signalled an interest in joining the bank. Brazil, I can tell you, is one of them. [South] Korea is another," says Mr Rischbieth.

In central America and the Andean region, lending by the CABEI and the CAF before the crisis exceeded IADB and World Bank lending in those regions. "Lending by the CAF in the Andean region amounted to more than the IADB and the World Bank combined last year," says Enrique Garcia, the CAF's president for the past 18 years.

Yet, in a G-20 resolution in London proposing that industrial countries provide MDBs with $100bn-worth of funds - to boost their lending to offset the fallout of the crisis in emerging economies - only the World Bank, IADB and other regional development banks are mentioned.

"But what happens to the Caribbean Development Bank, the CABEI and the CAF? My point is why should these sub-regional banks be discriminated against if they are actually more effective in providing funding in the region?" says Mr Rischbieth, pricking the bubble of a new-found unity among MDBs to deal with the impact of the crisis in Latin America together.

The IADB, which is also pressed for funds, posted its first ever operating loss in 50 years, of almost $1bn in 2008, due to investment losses in toxic assets backed by subprime mortgages. Edward Bartholomew, the IADB's chief financial officer, says that the losses "are largely a mark-to-market effect in the worst financial crisis in 75 years".

But while top ranking IADB officials, including Luis Alberto Moreno, the IADB's president, emphasise that the losses are little more than paper losses and will not effect the institution's lending capacity, US congressmen, other MDB officials and non-governmental organisations describe the incident as an embarrassment. They say it indicates that the IADB followed Wall Street speculation and risked twice as much of its cash portfolio in asset-backed securities as the World Bank, according to an outside consultant's findings, reviewed by the IADB's board in March.

Unfortunate timing

The timing of the incident is also unfortunate, as the IADB has just decided to ask its non-borrowing shareholders for a huge 160%, or $180bn, capital increase that will require the approval of the US Congress (the US holds 30% of the bank's voting power), and which could take more than a year. The IADB's Fund for Special Operations, which provides grants and soft credits to Latin America's poorest nations, is also depleted, just when these types of funds are most needed: during the crisis.

The IADB has had some success in finding ways to increase its capital immediately, however. This year, China became the bank's 48th country member and immediately invested $350m in the IADB's Inter-American Investment Corporation, the leading multilateral financial institution lending to small and medium-sized enterprises in Latin America. (China has also raised its profile in the World Bank with the appointment of the first Chinese chief economist of the World Bank.)

Additionally, during the Summit of the Americas in Trinidad in April, Canada's prime minister, Stephen Harper, announced that Canada would temporarily provide the IADB with $4bn in "callable" capital, allowing the IADB to issue $4bn in extra loans at once, without any corresponding increase in Canada's voting shares or IADB equity.

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