Hopes that debt owed by Latin America’s poorest countries to the IDB would be cancelled at the Belo Horizonte meeting faded this weekend, following dissent among the bank’s board members, Emerging Markets has learned. Rather than announcing a decision to cancel its $3.5 billion debt with Bolivia, Guyana, Haiti, Honduras and Guyana, the bank’s board—which includes representatives from impoverished debtors and other bank members alike – spent much of yesterday trying to hammer out a compromise solution in a desperate attempt to lend fresh momentum to the debt relief question.
The news will come as a disappointment to Bolivian president Evo Morales and Honduran president Manuel Zelaya, both of whom were scheduled to arrive in the Brazilian city yesterday to press for debt forgiveness. Instead, divisions between the US and Europe on one hand and Mexico and Brazil on the other are threatening to derail any substantial action on debt.
“We hope that at this meeting a commission will be created that will allow, within a short period, the formulation of positions [on debt relief] to support these countries within a development framework that is the purpose of a bank like this one,” Mario Arana, recently named Nicaraguan central bank chief and a former finance minister, told Emerging Markets.
Stumping up fresh funds for debt relief is a matter of controversy within the bank. If cancelled, the debt pay-down would come out of the Fund for Special Operations (FSO), a resource pool for concessional lending created with contributions from the United States and Japan as leading donors and with additional cash
from Argentina, Brazil, Mexico, Peru, Venezuela and other members. Without replenishment, debt cancellation would cut in half the FSO’s $7 billion pot.
Last year’s G8 debt relief offer, however, is a potential stumbling block for the IDB debt cancellation. The G8 nations pledged at the Gleneagles summit to write off HIPC debt, but have failed to put up any money to make good on this offer. This has led to reluctance on the part of key IDB members to do the same – Brazil and Mexico, are arguing that donors to FSO should not have to replenish the debt relief until or unless the G-8 does so, sources said.
Another sticking point is that Brazil and Mexico oppose topping up the FSO with ordinary capital since such funds themselves would be sapped—a predicament that befell the World Bank following its debt relief programme. In direct opposition, the US and Europe are pushing for the use of ordinary capital, sources said.
The US, however, expressed willingness to participate in talks on the issue. “We look forward to working with the IDB on a proposal to cancel IDB debts of the poorest countries in the region,” Brookly McLaughlin, public affairs specialist for economic policy at the US Treasury, told Emerging Markets. “We are optimistic this can be done in a way that’s win-win for all, and especially for those most in need,” she added.