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Emerging Markets

IDB confronts capital dilemma

IDB governors will on Sunday begin formal deliberations on the bank’s first capitalization since 1995 – and will have to make some stark choices. The call for more capital comes amid the region’s worst financial and economic downturn since the early 1980s.

IDB governors will on Sunday begin formal deliberations on the bank’s first capitalization since 1995 – and will have to make some stark choices.

The call for more capital comes amid the region’s worst financial and economic downturn since the early 1980s.

“Recapitalization is the top issue right now”, says Pedro Pablo Kuczynski, Peru’s former prime minister who authored a report for the bank that recommends a major capitalization.

The decision is crucial to the IDB’s ability to continue increasing lending, which topped $10 billion last year and will be close to $18 billion this year.

A committee headed by Kuczynski will offer the governors a number of scenarios for recapitalization. Callable capital would need to rise to $100 billion in the most modest scenario, but Kuczynski said he hopes for more. In the most ambitious projection, the upper limit could be close to $300 billion.

Authorities in the region are divided, with some expressing concern that the IDB capitalization might not make a difference. Chilean Finance Minister Andres Velasco said: “The IDB does a good job, but it is not clear that it can scale up to the potential needs of many Latin American countries.”

Brazilian finance minister Guido Mantega told Emerging Markets that Brazil and Argentina would contribute.

There are also questions about the bank’s internal management, particularly given the recent $2 billion loss in the mortgage-backed securities market. Kuczynski said that, while the investment was a terrible mistake, there has been a complete over-reaction.

One of the big questions marks over the IDB is the US approach. But there is early support among key players there. Congressman Democratic Congressman Gregory Meeks, from New York, said he wanted to study the Kuczynski report in detail, but that “given the crisis, the IDB can and must play an important role”. He added that transparency in IDB accounting would have to be agreed.

Meeks’ support is crucial because of his role as chairman of the international monetary policy and trade subcommittee of the House Finance Committee. He could also be a counterweight to Republican Senator Richard Lugar, the ranking minority on the Senate Foreign Relations Committee, who has been highly critical of the IDB in recent months.

Kuczynski said capitalization was justified for three reasons: the bank has a successful lending track record; the amount of capital physically be put up is relatively low; and its system of callable capital works well, allowing the bank to lend a lot with just a little cash on hand.

Shareholder countries would pay in around 4% of the amount approved, with percentages based on the shares they hold. For example the US, the largest shareholder with 30%, would contribute around $300 million per year over the next five years.

Kuczynski said that, if the governors approve $100 billion, it would be on par with the adjusted amount of the last capitalization, of $40 billion in 1995, which took the callable capital to $101 billion. The bank was lending much less then.

IDB President Luis Moreno said the strategy for recapitalization has been to “reach out to our shareholders”, explain to them the needs ahead, and tell them that “something needs to be done quickly” to increase the bank’s capacity to act.

The recapitalization proposals come at a time when the Andean Development Corporation (CAF) is also asking shareholders to fund an increase in its capital base.

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