In December, the presidents of Argentina, Bolivia, Brazil, Ecuador, Paraguay and Venezuela stood before their national flags in Buenos Aires and signed the founding charter of the Banco del Sur, the “Bank of the South”. The new bank aims to lend money to its member nations for social and infrastructure projects, with each member giving $1.4 billion from its currency reserves to the bank in coming weeks.
The finance ministers in the region announced in May 2007 that the new bank would be based on “democratic, transparent and participatory schemes that are responsible to their constituencies”, as the region enters a new era, with approaches different to the free trade neo-liberalism policies of the 1980s and 1990s.
Even as the socialist words of Venezuela’s president, Hugo Chávez, ring in the ears, several bankers doubt that this master plan will ever fulfil its potential. The bank says the first loans are expected in just a matter of weeks with around $7 billion of capital but there is a long way to go before any such handouts can start.
First, the main premise of the bank is that all members have equal voting rights and contribute equal amounts of money. However, Argentina, with Brazil’s backing, thinks that bigger countries should contribute more money – so already the first premise of the bank has been brought into question and queries on how this first $7 billion will be raised have emerged.
Then there is the bigger question of what Banco del Sur’s purpose will be. In the past five years, Latin American countries have gone from holding about 80% of the IMF’s loans to less than 1%. With the exception of Argentina, which received loans from Venezuela to pay down its IMF debts, these countries have made paybacks on their own. So does the region actually need a development bank any more? It would seem that the rationale behind Banco del Sur is as much political as economic. It is to replace a lending institution that none of the founding countries uses any more.
Another issue is the impact the new bank will have on local capital markets. The bank will make loans at subsidized rates and so undercut the member countries’ own capital markets. Surely time would be better spent developing policies and strategies to deepen the local markets rather than debating how to organize a new banking venture that would undermine them?