Latin America will face a big financing shortfall this year,
despite recent initiatives to funnel liquidity to regions in
need and a turn in capital markets sentiment, experts have
Global markets surged this week, after the US announced a new
plan to clean up its banking sector. UK prime minister Gordon
Brown on Thursday proposed a $100 billion trade finance fund,
and IMF chief Dominique Strass-Kahn announced a large expansion
to the Funds lending facilities to address financing gaps
in developing economies.
But fears are growing in Latin America that the new policy
initiatives including a proposed doubling of IMF
resources will fall far short of the mark, given the
pressure from capital outflows and dollar illiquidity.
Former IDB chief economist Guillermo Calvo said: These
initiatives are still insufficient to meet the public and
private sector funding needs of the region.
He warned that policy-markets and analysts have not awoken to
the historic depth and duration of the global downturn,
fuelling complacency about the regional economic stability this
Liliana Rojas-Suarez, chair of the Latin America Shadow
Regulatory Committee (Claaf), argued that unprecedented
resources must be made available through new
facilities and greater resources for existing institutions
to channel funds to the region.
Calvo, Rojas-Suarez and a host of prominent Claaf-affiliated
economists estimate that the region needs some $250 billion to
roll over public and private sector debt this year alone.
Our estimate is modest, and assumes only 20-30% of
outstanding debt is problematic, Rojas-Suarez said.
That sum would rival the proposed doubling of the IMFs
resources to $500 billion, likely to be agreed at next
weeks G20 meeting in London.
The CLAAF has proposed setting up a special emerging
markets fund to buy up public and private securities in
emerging markets, including Latin America, Rojas-Suarez told
Emerging Markets. This fund would open up to contributions from
governments and sovereign wealth funds, and aimed to be
between $250 and $500 billion.
The incentive for participation in the fund would be to make a
healthy return on investment, but Rojas-Suarez noted that
appropriate risk-sharing mechanisms would need to be
implemented to make the proposition sellable.
Brazils finance minister, Guido Mantega, echoed calls for
a radical increase in capital available to emerging markets.
I see a need for additional resources between $500
billion and $1 trillion. Beyond this, we need to create a
special credit line to finance trade in emerging
Calvo fears the systemic breakdown in the global credit markets
will force a long-lasting reduction in capital flows as
markets, households and firms deleverage in the developed world
for several years to come.
He argued that radical strategies are needed to address the
precipitous drop of financing. He says that development banks
needed to take on massive leverage and G7 borrowers benefiting
from the flight to quality should repatriate capital into
In the fourth quarter of last year, Latin America swiftly fell
into the global market abyss. Exports, industrial production
and domestic demand in the region plunged, as the developed
world sank deeper into recession. The commodity cycle has
turned against exporters: oil prices remained perilously low at
$50 per barrel this week.
Morgan Stanley estimates that Brazil contracted by 13.6% in
that quarter and Mexico 10.3%. Many observers have yet to
fully incorporate the severity of the decline we already saw at
the end of 2008 and into early 2009, argued Gray Newman,
chief Latin American economist at Morgan Stanley.