Sunday, October 04, 2009

Latin America faces cut in lending from Inter-Development Loan Bank

Financial Times: Warning of cut in lending to Latin America

The Inter-Development Loan Bank is currently the largest source of development finance in Latin America. Development finance in the region has dropped significantly since the start of the financial crisis. The IDB has increased its lending to make up for the drop, but is beginning to reach its limits with its capital base. The IDB has loaned over $14 billion in Latin America so far during 2009, double the amount of its loans to the region during 2008. Even though a recovery is starting to take place in the region, trade is still down nearly 25% since the start of the financial crisis. Furthermore, countries have increased public spending to curb the effects of the financial crisis and will likely need additional sources of funding in the coming years. Argentina has called on IDB members to double the resources of the IDB.

The IDB has laid out an aggressive agenda proposing to provide $12.9 to $19 billion in loans over the next decade in order to meet the demand of Latin American countries. This would significantly increase the IDB’s presence in Latin America, nearly doubling the amount of loans that it provided the region pre-crisis. The IDB currently has a capital base of $100 billion. The President of the IDB warned this week that unless the IDB found additional sources of funding, it would have to cut loans in Latin America by 60%. The 60% drop is slightly misleading, however, because of the IDB’s large amount of loans during 2009 relative to prior years. Furthermore, the IDB pulled forward planned future resources to 2009 in order to assist countries with the drop in development finance stemming from the financial crisis. The IDB will probably face some resistance to increased funding because it sustained a $1.9 billion paper loss in asset-backed and mortgage-backed securities in its $16 billion investment portfolio last year.

The IDB is not the only international financial institution requesting more funding. Both the European Bank for Reconstruction and Development and IMF have requested increased funding this year. The EBRD focuses on development in Central and Eastern Europe. It requested a 50% increase in funding from its members to assist countries with the financial crisis. Members of the IMF tripled the funds of the IMF to assist developing countries with the crisis in April 2009. The IDB is hopeful that its members will respond with the same sense of urgency that members of the IMF responded to its funding shortfall.

Discussion Questions:
Will Latin American countries that traditionally would have relied on IDB loans be able to secure other sources of financing, e.g., through the IMF or through asset sales to China if members fail to increase the IDB’s funding?

Should member countries decline to increase the funding of the IDB because of the losses it sustained in its investment portfolio?

No comments: