Saturday, March 27, 2010

Inter-American Development Bank Increases Capital

Sources: Financial Times – IDB shareholders discuss capital increase / Financial Times – IDB Governors agree on capital increase / Wall Street Journal - Brazil Min: US Demands Threaten IDB Capitalization / Wall Street Journal – Brazil Minister Warns IDB May Need More Capital / – IDB approves historical expansion of capital, financial package for Haiti / Business Week – IDB Management Questioned as Funding Increase Pared / Business Week - IDB Capitalization Stalls on U.S. Reform Drive, Bernardo Says / Business Week – IDB Board Agrees to $70 Billion Capital Increase

The Inter-American Development Bank announced on March 22, 2010 that its members agreed to raise the bank’s capitalization by $70 billion. Bank members reached an agreement at a meeting of the Bank’s Board of Governors in Cancun. The agreement represented the first increase in bank capital since 1994. After the increase, the IDB will have approximately $170 billion in resources. The Bank Board of Governors also agreed to provide additional aid to Haiti and forgive $479 million of Haiti’s outstanding loans. At the conclusion of the meeting, IDB President Louis Alberto Moreno stated, “This is a tremendous vote of confidence in the direction and vision of a reformed and renewed bank.”

The IDB’s membership base consists of 48 countries, 26 of which are borrowing countries in Latin America and the remaining 22 being non-borrowing countries from around the World. The US is the largest shareholder in the IDB, holding approximately 30% of the Bank’s shares, and will bear the largest burden of the increased funding. The US Congress must now approve the increased funding. Political commentators expect some fallout in the US from the increased funding because the IDB provides loans to member countries that have icy political relations with the US.

The increased capitalization will allow the Bank to loan approximately $12 billion annually over the next few years. The Bank loaned $5 to $7 billion in the years leading up the financial crisis. Brazil’s Planning Minister Paulo Bernardo asserted that the demand for loans is continuing to increase. For example, Chile, which traditionally does not utilize IDB loans, may now use some IDB loans to assist it in rebuilding from the powerful earthquake that struck the country this February.

Some IDB members immediately declared the increase was not large enough to meet the region’s needs. Following the approval, Armando Boudou, Argentina’s Economy Minister stated, “With time, it will surely prove insufficient.” Brazilian leaders predicted the IDB would need additional funding within three to four years. Brazil’s Planning Minister Paulo Bernardo stated, “We may be called in the short term to discuss capitalization again.” Mr. Bernardo went on to say that, “I heard a lot of complaints that it still wasn’t sufficient.” The IDB loaned $15.5 billion last year assisting its members with the global financial crisis. This represented a 37% increase from 2008 lending and was an organization record. Latin American GDP shrunk by 2.7% in 2008. Although Latin American economies are recovering, many of the region’s countries remain weak and need assistance to propel their economies back to higher growth rates.

Leading up to the meeting, the US was hoping for a $60 billion increase in capitalization while other members were demanding an $80 billion increase in capitalization. Member countries appeared to split the difference in agreeing to a $70 billion increase. Although $70 billion will allow the IDB to double its pre-crisis funding, the amount is significantly smaller than an IDB advisory board’s recommendation. Last year, an IDB advisory board recommended an increase of $150 to $178 billion, which would have allowed the organization to provide $18 billion of loans annually.

The US also demanded several reforms that ranged from environmental standards to increasing transparency before it would agree to increase the Bank’s capitalization. Brazil also pushed the IDB for increased transparency. The IDB made a series of questionable loans over the past few years. For example, the bank took a $1 billion loss last year because of bad bets on mortgage-backed securities. Both the US and Brazil hope that increased transparency will result in better decision making at the IDB. The members rejected most of the US proposals during the meeting; however, US Treasury officials still insisted after the meeting that they met their goals.

Discussion Questions:

Will there be any political fallout in the US from the increased funding?

Did the IDB act responsibility in loaning out a record amount last year before it secured additional funding?

Discussion Questions:

Was the funding increase enough or will the

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