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"Maybe we won’t see the same bank, but there will still be an Inter-American Development Bank, or Inter-American Bank, doing something different"
Eloy Garcia |
How has the bank changed over the years since you first joined and what was biggest change over that time?
My first job at the bank was as a loan administration officer for Chile, and that was the time of the Salvador Allende government, so I’ve seen a lot of changes. At that time Latin America was following the import substitution industrialization model, in which state-owned enterprises dominated. The bank was lending to the big public sector enterprises. We were involved in huge projects.
That changed gradually as the public sector shrank, influenced by the Reagan/Thatcher revolution and the fall of the Berlin Wall and the onset of the market system. We were gradually crowded out of infrastructure projects because these were privatized. So we moved into what was called soft development, which is education, public health, reform of the state – that kind of thing. So that’s how we have changed.
If you ask me when that shift happened it was in the mid-1980s.
And over the past 20 years has that change accelerated further?
Yes, of course. Well the bank has obviously become less influential in Latin America because its resources are not that great any more in proportion to the [region’s] needs. Also, the governments are not really leading the development process except in a few countries, it’s mostly the private sector. The bank has to be more careful now over how to use its resources and has to make sure that its catalytic role is much more effective and significant.
What have been the three or four most memorable incidents that you’ve been involved in?
Well, number one certainly was the oil shocks. That was really early in my career. The first oil shock was in 1973 and the impact it had on the region was tremendous.
At that time Mexico was not a major oil-producing country and the region suffered substantially. On top of that the macroeconomic policies were not sound – we had fiscal deficits, there was inflation. The region was in a big mess. So that was an eye-opener for all the young professionals at the bank and we developed a bit of a negative view of the region and it took years to overcome that.
The next shock was in 1979 when [US Federal Reserve chairman] Paul Volcker changed the monetary policy of the US. He went from targeting interest rates to controlling the growth of the money supply, which was out of control, and that created a savings and loans crisis. That was an environment in which we in the [IDB’s] finance department and treasury had to navigate. So that had another very negative impact [on Latin America].
And by that stage what were you doing within the bank?
At that time I was running the liquidity portfolio of the bank; in other words we were responsible for making sure that the bank had enough liquid resources to meet its financial obligations.
And the next incidents?
The next one, and I don’t want to sound negative but these were very bad times not only for Latin America but also for international finance, was the 1980s LDC [less developed country] debt crisis. I was in London at the time helping to recycle petrodollars. I was the UK representative running the London office. Our role was to sell B loans, the complementary financing programme, which was a way through which we recycled petrodollars.
And then in 1982 Mexico declared a moratorium on debt service. That was really a huge shock. We didn’t understand the significance of that announcement until probably a couple of years later when the markets practically dried up for Latin America.
What impact did those shocks have on the bank? How did it think it could actually do anything to alleviate the problems?
That’s a very important question. The bank at that time operated exclusively on a project-lending basis, which means that we disbursed loans on a pari-passu basis, that is we disbursed as progress on the projects got completed.
Now the problem is, when you have a shock, the first thing that gets affected is fiscal policy, so governments tighten their purse strings. As a result, if they are not providing local, that is fiscal counterpart funds, to IDB-financed projects, we cannot disburse. Ironically, we were pro-cyclical, that means if Latin America went into a downturn, the bank would refrain from disbursing. What we discovered was – what the bitter truth was – that the IDB was not being counter-cyclical, which is what a development bank should be. If things get tough, then that is when we should move in and try to help out.
In short, one of our shortcomings at that time was that our policies and operational structure that required that disbursements be made pari-passu with borrowers’ counterpart financing prevented us from being counter-cyclical.
In terms of your own personal achievements, is the bank’s first local currency bond, in Mexican pesos, your proudest moment?
Yes, probably. Remember, that happened at the peak of my career at the bank as a treasurer, so certainly that’s the area where I feel my contribution to the region probably was the most significant and the most visible.
What was the background to the transaction?
There is a story here. When Enrique Iglesias [IDB president at the time] visited Chile after Ricardo Lagos was elected president [in 1999/2000], Nicolas Eyzaguirre was his finance minister.
And Eyzaguirre said to Iglesias that he wanted the IDB to do a local-currency offshore bond in Chile.
So Iglesias asked us to look into it. We went down to Chile, we looked at it and there was a lot of good intention to do this bond issue. Then we came back and it was difficult because the infrastructure was very rigid in Chile. There was no way that we could do it because we were considered to be a corporate foreign company, not necessarily a supranational.