Banco del Sur is behind schedule. There is still no sign of a loan or even a constitution. But that doesn’t stop its proponents investing grand aspirations in the new regional development bank. The future is with the south, they say – and the bank can lead the way
On December 9 in Buenos Aires, leaders of seven South American countries – Argentina, Brazil, Bolivia, Ecuador, Paraguay, Uruguay and Venezuela – put their names to the founding document of Banco del Sur (BDS). (Colombia, which had announced its support in October, was not present.)
The December declaration gave the members 60 days to finalize the bank’s structure. The perhaps rather ambitious deadline came – and went.
“We are going to implement the Bank of the South,” Guido Mantega, Brazilian finance minister, tells Emerging Markets. “It is going to materialize. We are working on the bank’s statutes, and some points are still missing regarding shareholders’ contribution to the bank’s equity. The decision depends on a meeting that is still pending, but it will happen soon.”
This isn’t the first missed deadline: in the Quito declaration of May 3, 2007 – when Brazil first added its name and economic weight to the project’s sponsors – the bank’s launch was set for last June. As that date passed, many analysts wrote off the bank as a fantasy.
“Not long ago Banco del Sur was taken as a joke,” says Jorge Marchini, professor of economics at the University of Buenos Aires, and coordinator of the debt campaign group International Debt Observatory (IDO). “It was seen as a Hugo Chavez pet project that no one needed to take seriously.”
Those days are gone. The question now is not whether the bank will become a reality, but what it will mean for South America when it does. Proponents see this as just the start of something big – what Venezuela’s former economy minister Rodrigo Cabezas called in an interview with Emerging Markets “a new financial architecture for the south”.
Votes and capital
In their public statements, the leaders behind the bank are united in a vision of southern independence. “The region has traditionally been forced to request resources in exchange for adopting policies that were not what populations wanted,” Ecuador’s finance minister Fausto Ortiz tells Emerging Markets. “Banco del Sur will allow for financing projects without having conditions placed on activities or sectors. There is an important change in the way of seeing how businesses and our nations are funded.”
Similarly, Brazil’s president Lula da Silva, speaking in October, said in reference to the bank that “developing nations must create their own mechanisms of finance instead of suffering under those of the IMF and the World Bank, which are institutions of rich nations.”
But it’s no secret that there have been tensions behind the scenes. Key divisions can be traced back to that Quito meeting, where an initial draft from Venezuela and Argentina was challenged by a more radical Ecuadorian proposal.
Ecuador has taken a particularly active role in shaping the bank. It championed representatives of “civil society” in the discussions alongside the politicians.
One member of its current delegation is Hugo Arias Palacios, coordinator of debt campaign Jubileo 2000, while its proposal back in May was part-authored by Marchini and fellow campaigners Eric Toussaint (president of Brussels-based Committee for the Abolition of Third World Debt) and Peruvian economist Oscar Ugarteche.
“I think it is very important to have citizen oversight so the population can see what government is doing, so that there is transparency in how resources are used,” says Ortiz. “Control should not be exercised only by state agencies, but from civil society that is involved in what the state and its authorities are doing.”
A particular sticking point for the Ecuadorian team, according to Eric Toussaint, was a proposal that voting rights be proportional to each country’s capital contribution – which might vary greatly given the relative sizes of member economies and reserves. In the Ecuadorian response, loans would go to the public sector; accounts would be public and functionaries have no tax or legal exemptions; and each member country would have one vote.
More recently Venezuela has backed one member one vote, while Brazil is reportedly arguing for proportionality between capital and decision-making. Are the Quito difficulties any closer to being resolved?
“There is still no consensus on voting rights or equity shareholding,” says Mantega. “But ministers will reach an agreement. Technicians for all parts sometimes do not have the power to make decisions; it can only be sorted out at ministerial level.”
The bank’s protagonists condemn the “injustice” of the existing institutions where richer nations have voting control. According to Vince McElhinny, manager of the Latin and Caribbean programme at lobby group Bank Information Center, writing in a detailed report on the state of Banco del Sur proposals as of November 2007, the US controls about 17% of World Bank and IMF vote shares, and 30% of the IDB vote share – more than the seven Banco del Sur nations put together.
The question is how equal say can be squared with the very unequal economic might of the members. Seven billion dollars is the figure commonly quoted as initial capital for the bank. There has also been talk of countries assigning 10% of reserves. For Bolivia or Ecuador, 10% of reserves would be around $400 million – so a total of $2.8 billion if every member put in equally, well short of the $7 billion goal. On the other hand, if Brazil put in 10%, that would be $16 billion. (It is not clear whether these sketchy figures would apply to paid-in or callable capital.)
“We understand that there should not be an hegemony of one country over the others within the Bank of the South,” Mantega continues. “There should be some proportionality according to individual contributions to the bank’s equity, but every country will count.”
Oscar Ugarteche, speaking after meeting with Ecuadorians working on the project, says the voting rights issue is approaching a conclusion. He mentions a proposal that equal votes be matched by equal contributions of $1 billion each – but with countries given three or five years to put in their shares.
“In fact, this isn’t the biggest sticking point any more,” he says. “The main issue to be faced now is how the bank’s personnel is recruited. There is a further worry of imbalance there – do countries like Paraguay or Bolivia have professionals to work at the bank?”
Projects
Another issue is the kind of projects the bank will fund. Infrastructure projects – such as the proposed Andean oil pipeline – are often mentioned. In an October press release, Bolivia’s finance minister Luis Arce talked of the need for funding for state-owned petrocarbon and mining companies. Ecuador has called for a focus on social projects.
“Latin America now has its strong private-sector multinationals, which are developing big industrial projects,” says Marchini. “But one point of view says these companies are able to fund aggressively for themselves. The bank should then concentrate on addressing the region’s major failings in areas such as healthcare and social security, supporting the public sector.”
One constant is the theme of regional integration. But what exactly does that mean? And integration on whose terms? One story would have the founder members divided into ideological camps: Bolivarian idealists led by oil-powered Venezuela, against a pragmatist camp led by Brazil.
“I suspect Brazil would have liked it to just carry on as a discussion with no momentum behind it,” says one well-connected source. “And from conversations I’ve had with some Brazilian officials, they appear even a bit embarrassed by the whole thing, but Brazil couldn’t afford to be left outside of a Venezuelan-dominated project.”
If there is such a conflict, it might be as well explained by interests as opinions. Brazil’s powerhouse economy has nothing like the same need for the bank as the smaller nations. And Brazil has a well-capitalized and functioning national development bank all of its own, BNDES, which is already funding a number of regional schemes with neighbouring countries.
“BDS and BNDES will have a very close relationship,” says Mantega. “The BNDES already helps in terms of export financing and project implementation in other countries, so there will be important partners. Every country will have a development bank which will act as an agent of the Bank of the South.”
The markets
Whatever the capital structure of the bank, $7 billion won’t go very far. The bank’s relationship with the capital markets remains a key question. “This issue is not something we’ve heard much about so far,” says McElhinny. “It may come later on the agenda, after capital contributions and project criteria.”
Campaigner Eric Toussaint has called for the bank to stay away from markets altogether and to borrow instead from member countries while raising “common global taxes” such as a regional Tobin tax, but few expect the bank to turn its back on markets. Brazil’s Mantega has said the bank may look to borrow directly on international capital markets to lever up its capital. Venezuela’s joint Bono del Sur bond issues with Argentina have been talked of as a forerunner to debt issuance by the bank.
Indeed, even if the bank is funded through borrowing from member states, these members themselves are regular users of the debt markets, which maybe raises a further question: how the bank will add value when South American countries can finance themselves with increasing efficiency on local as well as global debt markets.
“Many of these countries are now in a very good economic position, with high reserves and strong liquidity,” says Alberto Ramos, senior economist at Goldman Sachs in New York and a former senior economist at the IMF. “This is part of the reason why multilateral lenders are currently playing less of a role in Latin America. The idea of a regional bank to promote integration projects is noble – but it remains questionable whether the reason projects fail to get done is because the funding isn’t there through existing channels.”
“We think there is a real need for Banco del Sur,” says Fausto Ortiz, “a bank that capitalizes the reserves we currently have deposited in the first world. It is important to have a bank that provides loans without the levels of conditionality of the multilaterals, and to have our own development bank. We are creating the space for a bank that can use the reserves of the region’s countries to finance development.”
Some critics view the bank as following a political agenda that might be incompatible with efficiency – and perhaps market and rating agency approval. Advocates such as Ugarteche counter that it is existing institutions such as the World Bank that import politics into development banking through loan conditions.
Brazil’s Mantega says the need for sustainability is clear. “The bank has to be a profit-making institution that does not depend on government subsidies, with a self-funding capacity and sustainability,” he says. “It can’t be a bank that gives money for nothing, or finances non-productive projects. It has to be a bank like the BNDES, with return rates and which selects projects on their merits according to financial criteria. All countries have agreed to this.”
Architecture of the future
In the Ecuadorian proposal, the bank is just the first step along a road that would include a regional monetary fund and
eventually a single currency for the continent.
“Yes, Latin America now has a very stable position in the capital markets, and there are no balance of payments issues in the short or medium term,” says Marchini, “but that means this is a good moment to think about how we can put in place a system that will safeguard us from the uncertainty of capital markets when things turn less favourable.”
For critics, the notion that Latin American countries should guard against the next rainy day by spending on a grand scheme like Banco del Sur makes little sense. “In a world where globalization of capital flows is serving the region well, what do you want a specifically South American architecture for?” asks Peter Hakim, president of the Inter-American Dialogue, a Washington-based think tank, which counts 12 ex-presidents from across the Americas among its members.
As for concrete steps, it seems a stabilization fund is some way off. “Today, the most important thing is to create a development bank, not a stabilization fund,” says Mantega. “We are more stabilized today than the most advanced countries. It’s already difficult enough to set up a regional development bank; a regional stabilization fund is not on the near agenda.”
But a regional currency is on the table. Oscar Ugarteche explains that the idea first came from a leader outside of the seven – president Alan Garcia of Peru. “He raised it when he visited Quito for president Rafael Correa’s signing-in ceremony last January,” says Ugarteche. “It was then picked up during the Banco del Sur discussions in April, and all the signatories to the Quito declaration subscribed.”
Ugarteche believes the currency project could attract even wider support than the bank – with Peru and possibly Colombia interested, but it seems the first moves are being made down in the southern cone. “This year we are going to move ahead with Argentina in the direction of financial integration,” says Mantega.
He says that in the second half of the year a local currency trade scheme will be in place for bilateral trade between the two countries. Transactions will be made in Brazilian reais or Argentine pesos, with only the difference in trade flows settled in dollars at the end of the day by central banks.
“In the future,” says the minister, “it may be extended to other countries in the region until we reach a common currency. One day we will have a South American euro with the same value and prestige.”
Additional reporting by Thierry Ogier and Lucien Chauvin