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Development Bank Rethinks Role In Latin America, IADB Mirrors IMF, World Bank By Offering New Servies
Wall Street Journal
June 27, 2007

By BOB DAVIS

June 27, 2007; Page A7


WASHINGTON -- Looking to carve a new role for itself in the global economy, Latin America's biggest development bank says it will expand the kinds of loans and services it offers to help countries in the region hedge against economic downturns.

The Inter-American Development Bank's plan to remake itself closely mirrors similar efforts by the World Bank, the International Monetary Fund and other regional development banks. With many developing nations free from financial crises and able to tap a flood of private capital, international financial institutions are struggling to show they still matter.

The IMF, for instance, recently said it would monitor currency manipulation -- a goal long sought by the U.S. and Europe. The World Bank has been focusing on Africa and also trying to figure out how to fight corruption generally in poor nations.

"In a world of abundant liquidity, we have to move beyond the provision of just long-term dollar loans to our customers," said Daniel Zelikow, the IADB's executive vice president, who is overseeing the bank's repositioning.

The IADB says it is willing to take larger risks than it has in the past. Rather than lend solely to national governments, the IADB is starting to lend to state governments, cities and local development banks -- even when the central government doesn't guarantee repayment. The bank also plans to increase the percentage of loans to private-sector borrowers to 10% of its outstanding loans from 3%. In 2006, the IADB had $46 billion of loans outstanding.

Lending will increasingly be done in local currencies rather than dollars, the IADB said. Latin-American nations that have been too heavily dependent on dollar-based loans have suffered during currency devaluations because their debt load soars. The IADB is also developing different financial instruments to help nations hedge against swings in interest rates, exchange rates and commodity prices.

The bank didn't provide specifics of the new financial vehicles being planned, but pointed to $52.5 million in credit guarantees it approved in December for a Mexican mortgage lender whose customers are low- and middle-income borrowers, as an example of the kind of financing it wants to expand. The guarantees were denominated in pesos.

Nancy Birdsall, a former IADB official who now runs the Center for Global Development, a Washington think tank, says Latin nations have long been pushing the IADB to come up with creative ways to hedge against risks. A Mexican border city that is heavily dependent on the U.S. economy, for instance, might want IADB guarantees to float a bond linked to the U.S. rate of growth, she said.

For decades, the IADB and other international development banks followed a simple business model. They borrowed cheaply, through high-grade bonds, and loaned at a profit to developing nations that would have had to pay much higher rates to private lenders. During economic crises, the regional banks, World Bank and IMF provided big bailout packages.

Those loans came with strings attached. Crisis loans often required countries to liberalize their economies and privatize companies. Development loans to build highways or water projects included stiff environmental standards. Those requirements bred resentment and a search for alternative lenders.

Argentina, which forced through a debt restructuring in 2005 that borrowers complained shortchanged them, has borrowed more than $1 billion in recent years from oil-rich Venezuela, although it still borrows from the IADB, too. Venezuela's president, Hugo Ch vez, is trying to create a new Bank of the South as an alternative to the IADB and World Bank. Meanwhile, Morgan Stanley analyst Gray Newman estimates that Brazil will have $200 billion of reserves by year end, enough to pay off all its public and private debts, which makes the country much less dependent on international financial institutions.

The IADB is owned by its 47 member countries from around the world, with the U.S. having the largest share at 30%. As a group, the borrowing members in Latin America have slightly more than a 50% stake in the bank, while the lending members have slightly less than a 50% a share.

With demand drying up for traditional loans, the IADB, along with the World Bank and IMF, is looking to boost other services, especially consulting. Mr. Zelikow says the advice would focus on "core areas," such as sustainable energy, water projects and poverty alleviation. But it is far from clear whether countries or other customers would pay for such device.

To acquire the expertise needed to offer new services, the IADB is revamping its staff and offering buyouts to veteran managers. The bank, which currently has a staff of 2,000, including about 120 managers, didn't estimate how many it expects to leave. "Our reorganization isn't primarily about reducing costs," Mr. Zelikow said.

The shake-up has produced widespread anxiety in the IADB's Washington headquarters. On June 6, the bank's staff association sent an "open letter" to IADB President Luis Alberto Moreno, complaining that the restructuring effort "has been erratic, with limited participation and transparency." Mr. Moreno replied two days later that he is trying to work constructively with the staff, but said he is "convinced of the need to change and aware of the great challenges we face."

Vince McElhinny, a Latin America analyst at the Bank Information Center, a watchdog group in Washington, worries the IADB will ease its environmental requirements as it hustles for new business. Mr. Zelikow said that wouldn't occur.