Banco del Sur Act II

Tony Phillips; Buenos Aires, Friday 8th. May, 2009: The Finance/Economics Ministers of seven South American countries met on Friday 8 May, agreeing to the formative details for the alternative South American regional development bank, Bank of the South , (BDS). These were the four member countries of Mercosur (Argentina, Brazil, Paraguay & Uruguay)— along with three other UNASUR members, Bolivia, Ecuador and Venezuela.

Finance ministers agreed to BDS technical rules on Friday, May 9 2009. This detailed agreement runs a bit behind schedule. On December 9 2007, the then Presidents of these seven countries signed the founding act in the Presidential Palace in Buenos Aires. The technical discussions were supposed to be finished within two months. Instead, negotiations took a full seventeen months. Argentine host, Economics Minister Carlos Fernandez, put on a positive face, praising the agreement “given [that the process] took place during an international economic and financial crisis.” He added: “Each country will have one vote in the entity. Current details include the following: Argentina, Brazil and Venezuela shall each provide $2 Bn.; Uruguay and Ecuador, another $400 Mn. each, while Bolivia and Paraguay shall pay another $200 Mn. in equal part. […] The amounts would be provided in five installments over a five year timespan.”

“We have now closed discussions at a ministerial level and what remains is approval by the presidents and national congresses,” said Minister Fernandez in a press announcement with his Brazilian counterpart, Guido Mantega. Fernandez added that he did not believe that ratification by the seven member countries would be problematic, as negotiators have already reached a compromise on some of the more contentious BDS operating rules. One example worth noting is that the one-country one-vote rule has been effectively altered. An added clause now specifies that a two-thirds majority vote shall be required for larger transactions.

On the night of the BDS founding, Dr. Pedro Páez, Ecuadorian Coordinating Minister for Political Economics, de-livered an upbeat talk in Buenos Aires to civil society groups in the Judicial Federation of Argentine . He cited the need for civil society to continue to lobby for a socially conscious and effective BDS, countering conservative forces as well as other interests, which, he noted, had been responsible for delays in its formation. In a talk enti-tled “New Financial Architecture in Latin America and the Caribbean”. Paéz offered some general information on the BDS meeting (a closed door affair), as well as on some other complementary announcements. One of these was the extraordinary meeting of ALBA in the city of Cumaná, Venezuela that closed on 12 April .

Global & Regional Financial Structures
In times of global recession, multilateral financial groups often disagree on strategy. First the G-8, then the G-20, and now the United Nations G-192 (United Nations movement under Joseph Stiglitz) are presenting competing proposals, buffering the planet against the effects of financial excess. Global, regional and national stimulus packages and financial rescues have already promised between nine and eleven trillion dollars in funds. The two regional efforts have been promoted by the European Union and ASEAN. Regional efforts also include smaller funds to dampen adverse effects recession and continue in parallel.

Given the current difficulties faced by countries as well as regions, some might question the logic —or at least the timeliness— of creating a new financial infrastructure while the existing system is close to collapse. Such fears do not take into account the experience gained by some Latin American experts in the 1990s when a domino pattern termed the “Tequila Effect” started with Mexico and spread to destabilize most national economies throughout Latin America. The most spectacularly destructive collapse was that of the Argentine default in 2001/2002. The Latin American crises, like those now being experienced worldwide, resulted in mass unem-ployment and unheard-of levels of indigence, bringing detah by starvation to marginal communities of food-exporting countriesAs in many financial crises, some profited, emerging as billionaires.

While global cooperation is practical and ultimately necessary for issues like regulating transnational banks, establishing accounting standards, and monitoring or eliminating offshore tax havens, regional trade and financial groups play a different role. For example, regional groups face the additional challenge of being a community of neighbors. This has its benefits when considering gas pipelines or train lines. But neighboring countries are difficult to ignore. A case in point emerges in the current dispute involving default on repayments to the National Development Bank of Brazil’s (BNDES) solidarity fund, a “foreign aid” package to build a hydroelectric dam in Ecuador —a contract won by Brazilian giant Odebrecht and which Ecuador alleges was executed badly. With frequent political meetings in various Latin and South American fora (such as UNASUR) governments have a strong incentive to resolve such issues. In this case, presidents Lula and Correa have discussed the matter but Odebrecht has rejected Ecuadorian offers of external arbitration .

In other regions trade associations are expanding to include financial cooperation. The European Union and the Asian ASEAN countries (plus Korea, Japan and China) have been actively promoting regional trade and financial stability pacts with varying degrees of success. In South America, the BDS is viewed by regional presidents, and some of their economics ministry staff, as a key factor in promoting development.

Journalists Creamer & Gallego-Díaz conducted an interview with President Rafael Correa in Quito on the 28th of April for the Spanish newspaper El País. These two journalists quizzed the President of Ecuador on a strategy for creating a new regional financial architecture (of which the BDS is a component). As President Correa is a bona-fide economist, he offered succinct and revealing replies:

“[we have been] proposing [the BDS] for some time and it is now taking shape. Latin America’s current financial reality is an absurdity. As a result of neoliberalism among other issues, in the 90′s, all [Latin American National] Central Banks were made independent [of their government] . With absolutely no technical nor theoretical basis, it was insisted that anonymous central banks would work better. This was a huge lie. They were autonomous from our democracies, but very dependent on international bureaucrats. These Central Banks handle our international monetary reserves and they invest them abroad, in the first world. Latin America has more than $200Bn dollars abroad financing the US and Europe. That is absurd”

When asked what were his alternate proposals Correa suggested:

“Take these reserves back, create a reserve fund for Latin America which will allow local economies to back their currencies [so that by sharing such a reserve pool] each individual country will require less reserves.” “[...] the strategic elements are: BDS, a South American Regional Reserve Fund and a regional currency, which can begin as a transactional electronic currency, like the ECU ”

“This is what has been demonized here [by conservative financiers in Ecuador] and this is what we have begun.”

President Correa was hinting here at the same conservative forces that continue to maintain control of public debate in academic arenas and media, forces strongly opposed to any change in Latin America’s regional financial architecture, which would serve to weaken US and European influence in the financial sector in general and the banking sector specifically.

Asian Parallels
President Correa’s ideas promoting Latin America’s financial stability are not original. They are based on the European Union’s financial model along with its ECU —European Currency Unit— a forerunner of the Euro. When Correa refers to the model for the BDS he could also be referring to an analogous structure to the European Bank for Reconstruction and Development. When Correa refers to an (as yet unnamed) bank that might manage Latin American reserves and emit, its bonds, he is describing a structure similar to the European Central Bank (ECB).

While Europe may be a pioneer in regional financial architecture, the community of nations organized as mem-bers of ASEAN are clearly ahead of countries in Latin America, especially with respect to financial coordination. ASEAN is a project much further ahead than the Latin American one, especially when it comes to financial coordination. As a region, ASEAN also shares a recent history of financial crises. To their detriment Asian members also submitted to questionable IMF advice during the financial crises of the 1990s. In Asia, the equivalent structure to the BDS takes the form of the ASEAN development bank (ADB). The ADB has now become part of a more complex financial infrastructure, recently reinforced by hundreds of millions of dollars procured in the heat of the global financial crisis. On May 3rd, Asian governments put their financial might behind an ASEAN regional stabilization initiative, ASEAN. (you’ve already introduced this, remove this last sentence or move it up) Known as the Chiang Mai Agreement , made good on a $120 Bn currency scheme, had been discussed since 2000. The Chiang Mai Agreement was ratified by the ASEAN countries plus three others (Japan, China and South Korea).

Regarding the Chiang Main agreement, the Financial Times of London had the following to say on the Asian in-auguration ceremony:

“Kaoru Yosano, Japanese finance minister, [...] said the latest offers underlined Tokyo’s belief that the crisis required a more concerted international response… “The financial crisis is not something hitting only a handful of countries,” he said. “That is why we believe it is an issue that can only be solved with international co-operation.”

Japan pledged $100bn in extra capital to the International Monetary Fund in November of 2008, and has been anxious to sustain its leadership in Asia in the face of China’s massive foreign reserves and rising economic muscle. Rivalry between the two countries surfaced in the final stage of the Chiang Mai negotiations, with both countries agreeing to provide $38.4 Bn while South Korea will contribute $19.2bn. The remainder of the promised $100Bn will come from the ASEAN members.

Absurd
Martin Wolf, Chief Economics commentator at the Financial Times, commented on ASEAN’s efforts in an article entitled “Asia needs its own monetary fund” on May 18, 2004. Wolf notes: “Today, Asian governments are exporting astonishing quantities of capital, overwhelmingly to the US. This is not just absurd. It is also economically destabilizing.”

Now the Asian financial might is seeking investments across the globe but it is also supporting its neighbors. Some of its vast capital reserves will stay in Asia in funds like ASEAN.

The term “absurd” is used by Martin Wolf to describe poorer Asian countries placing their reserves in US Treasury Bills and President Correa echoes this same term when speaking of Latin American reserves. However, more poignant still is Dr. Wolf’s second conclusion that this is “economically destabilizing.”
Economic stability relies on good economic planning. If a country has the breathing space to make a plan, then it also has a chance of planned development. In the best of scenarios, reduced dependence on external financial systems, such as the IMF and the US Treasury, means that the poorer nations of Latin America could use their own funds to encourage their own development. Holding government reserves abroad in bonds denominated in other currencies often yield less than 4% returns per annum, while at the same Latin governments are often pay-ing much more than 10% in interest on public external debt, much of which is also denominated in dollars and euros. This pattern proves destabilizing. When a country is scrambling to procure funds to rollover debt principal and make each year’s interest payments, short-term planning is often the only planning possible. This renders long-term development impossible. If a development project does require funds, such funds are often only available through further external borrowing which implies more debt, a vicious cycle which in the end is suffocating for national economic development. Such is the case in many governments in South America, with Argentina serving as an excellent example.

The absurdity of keeping reserves in bonds denominated in dollars and euros defies logic except in the world of currency trading and speculation where it remains essential to protect one’s currency using large foreign re-serves. This is a delicate and expensive game which the Euro countries no longer pay-to-play. The development motivations of forming the BDS constitute a belief that keeping Latin America’s precious reserves at home to loan to other Latin American governments to build much-needed infrastructure is preferable to taking aid and development loans from the IADB and other Multilateral Development Banks (MDBs) since such external loans often stipulate that consulting or whole projects be sourced from outside the region thereby preventing nascent Latin American corporations from maturing by reducing their income stream.

Volatility Issues with South American Trade and Currencies
Latin America has of some of the world’s largest countries with respect to land area. But the continent has no really large global economy: and only two medium-sized economies, Brazil & Mexico. The region lacks a local hard currency as a basis for international, and especially intra-regional, trade. Many of the commodities that South American countries export are not traded in the currency of the originating country. So, if Chile imports oil from Argentina or Argentina copper from Chile, they pay in US dollars. A regional currency would facilitate trade and the creation of financial service hubs. Europe developed its financial services and its regional development bank around the Pound Sterling, the Deutschemark, the French Frank and now the Euro. The US Dollar filled this role in North America, and the Yen (and increasingly the Yuan) in Asia. The lack of a continental currency leads to unstable national currencies and also financial dependence. Three Latin American democracies are dollarized (Ecuador, Panama and El Salvador). While the Bank of the South will not replace the use of the dollar, even in development projects, it could be a step in the right direction in terms of locally-sourced development infrastructure.

Latin America is rich in real terms, however its financial infrastructure is primitive. This means that many national and international transactions pass unnecessarily via northern financial centers, sometimes requiring two hard currency conversions from buyer currency to dollar to seller currency. Buying an apartment in Buenos Aires, for example, involves a transaction in dollars. For a time this was also the case in Brazil. However, increased self-reliance, the strength of the Brazilian Real, and banking rules has replaced the dollar with the Brazilian Real.

One recent step forward has been a bilateral Central Bank agreement between Brazil and Argentina, allowing trade to occur between the countries facilitated in local currencies. However, this Central Bank facility is not backed by basic financial services in Sao Paulo or Buenos Aires such as currency hedges to insure the transac-tion in the case of a sharp currency move between the Brazilian Real and the Argentine Peso. With the global financial crisis, currency moves are becoming more volatile. The result is that traders pay extra to buy and sell US dollars, which offers them the currency security they need to plan ahead (assuming derivatives markets in the north recover their stability).

Latin America has experienced economic instability for centuries. Some economic historians believe this to be the result of bad habits inherited from colonial times. If this is the case these habits continue to inhibit local development. During the Spanish and Portuguese empires export policies were policed by viceroys for the benefit of their Iberian kings (and corrupt local customs officials). With military conquest came exploitation of human and natural resources for export markets abroad. Iberian royalty cared little about the working conditions in their silver mines or large estancias . It never even occurred to them to pay for the silver and gold coins smelted there for use in Madrid or Lisbon which funded Europe’s development. In effect they were a free loan.

With independence came change and much improvement in the chain of international production. Recent decades, however, have seen another consolidation in the control of exploitation, production, transport and marketing of South American resources. The chain of production has shifted to the hands of private transnational corporations. Examples include US transnational Cargill’s activities in grains and oils (especially soybeans) in Paraguay, Argentina, Bolivia and Brazil, or banking giants such as Citibank and HSBC. There is also a strong presence of Spanish transnationals such as Telefonica, Banco Santander, BBVA and Repsol.

In postcolonial times, Latin America’s economic problems have been compounded by debt and by the fact that none of South America’s commodity exports are denominated in their own currencies. This has a cyclical destructive pattern in Latin American regions as a result of the shortage of savings in local currencies. Who wants to save for a rainy day when their currency is constantly losing value, if not by internal inflation, then by forced devaluation relative to other currencies? When Argentines have excess currency they ask their economist friends: “Should I buy euros or dollars?” In Brazil some save in hard currencies but due to recent economic stability and high rates many save in Reals. Much of Latin America’s debt began with “development” or “aid” loans made to the region via development MDBs such as the IADB or the IMF. Much of this money was used in Latin America to develop local infrastructure and to buy weapons for the military but the money never left the lending countries – it was simply recycled into their arms manufacturers and developers. When President Chavez of Venezuela presented US President Obama a copy Eduardo Galeano’s “Open Veins of Latin America” which is subtitled “Five Centuries of the Pillage of a Continent”, the symbolism of the running veins has a parallel, indeed, causative analogy in international finance. If the rivers of interest payments are dammed, they will stop pouring into oceans of foreign finance and instead can be recycled in Latin America. This could result in a constructive dynamic cycle of growth and currency stabilization. A regional bank such as the BDS will promote peace and encourage sourcing of development locally resulting in dynamic development also in the local country exporting the service. It provides one part of a lake of local finance which has the power to replenish itself from local fonts.

To examine the cyclic destructive nature of current lack of development, consider the following characteristics of Latin American public finance:

Dr. Pedro Páez commented on this regional uncertainty in the context of the global financial crisis. He stressed that the current world financial crisis is leading to greater concentration of global wealth due to nations being forced to salvage their financial sectors by bankrolling of private financial interests. While such problems are mainly in developed countries capable of the financial sophistication, to make them a victim of their own financial services sector, Paéz pointed to some local risks too in Latin American economies. Paéz singled out competitive devaluations as a distinct risk, one that can be alleviated by trade policies based on regional solidarity, and not solely driven by raw competition. Such policies, along with policies of nationalization of critical economic sectors, fly in the face of the interests of transnational corporations operating across multiple Latin American borders. The ALBA system of trade, for example, has two primary tenets related to trade and production: Solidarity, complementarity and non-competition along with harmony with mother nature and not one based on plunder. No such clauses exist in MERCOSUR, which was a child of neoliberalism of the 1990s.

Dr Paéz’s own country, Ecuador, has recently taken measures to escape the debt trap. Ecuador assembled the CAIC, an internationally advised national debt audit committee, in its department of finance. As a result of the corrupt loans President Correa has refused to pay what the committee ruled on as fraudulent and/or onerous debt in an effort to break the debt/underdevelopment stranglehold that high debt repayments brings.

This has not made Ecuador any friends in the international financial community. Like Argentina or Iceland, the Ecuadorian default has lead the country to be punished by “high country-risk” status, making traditional sources of investment and credit expensive or completely unavailable from New York, London, Berlin, Paris and Tokyo. This lack of alternative funding makes creating an alternative source of development like the BDS even more at-tractive for the black sheep of international finance.

Toward a future financial integration
If the BDS launches, then the region may move towards other modules described by President Correa above, a regional fund (like the IMF was designed to do after WWII) for reserves, and a common currency. The other two elements will offer the region an opportunity to stabilize currencies relative to each other and prevent competitive devaluation, by loaning to each-other in times of stress. It is also a prerequisite for a common currency.

Dr Paéz discussed a transactional currency introduced at the latest ALBA-TCP conference in Cumaná, Venezuela. ALBA was introduced as a “Bolivarian” alternative for Latin American commerce. In Cumaná a nominal transactional currency was introduced called the Sucre for transactions between ALBA nations in Central America, the Caribbean and South America. For any such system to develop into a transactional currency it will have to have the participation of Brazil and Argentina to gain acceptation.

For now, currencies are still national, and fiscal policy shall be tight for the next few years. Latin America is likely to need to look to new markets and currency swaps with China and with each-other. Long-term stability will re-quire saving and investment in Latin America. It will also require the development of a basic financial base with local control. Joseph Stiglitz is quoted as saying “[Economics as taught] in America’s graduate schools… bears testimony to a triumph of ideology over science.” Could it be that Latin America’s problem is that they translate and photocopy those same textbooks?

NOTES:

• For the purpose of this article (and absent a standard in the English language for an abbreviation of this, as yet inoperative Bank) the letters BDS are used here to abbreviate the Spanish and Brazilian Portuguese name (Banco Del Sur / Banco Do Sul). For a general discussion of the BDS see: http://www.networkideas.org/alt/feb2008/Latin_America.pdf

• Name in Spanish: Federación Judicial Argentina,

  http://www.fja.org.ar

• Stiglitz is chairman for the Commission of Experts of the President of the UN General Assembly on Reforms of the International Monetary and Financial System.
  http://www.un.org/ga/president/63/commission/financial_commission.shtml :
  Accessed Monday May 11th 2009

• (Spanish (diplomacy) , accessed May 14th 2009) 

  http://www.elcomercio.com/noticiaEC.asp?id_noticia=276148&id_seccion=3

• http://www.elpais.com/articulo/internacional/problema/eje/Venezuela/Bolivia/Ecuador/elpepuint/20090428elpepuint_5/Tes#EnlaceComentarios:  Accessed Sunday May 10th 2009
• For a discussion on Central bank independence and how it was reneged upon in Europe and the US see Guido Tabellinis © voxEU.org article “Why central banking is no longer boring” where he says:   “There’s also a political side to these questions. Delegating monetary policy to an independent bureaucracy requires that policy decisions be guided by technical criteria and a solid knowledge of the subject matter. If instead, larger and more uncertain questions open up, politicians will be tempted to break central bank independence and take back decision-making.”
  http://voxeu.org/index.php?q=node/1259
  
• ECU stands for European Currency Unit, the predecessor of the Euro.
• http://www.elpais.com/articulo/internacional/problema/eje/Venezuela/Bolivia/Ecuador/elpepuint/20090428elpepuint_5/Tes#EnlaceComentarios :  Accessed Sunday May 10th 2009
  
• which Correa cites in interview with Spanish journalists
• Chiang Mai:   After the city in northern Thailand where the initiative was launched.
• (minus Indonesia)
• http://www.ft.com/cms/s/92d94ba6-24e4-11d8-81c6-08209b00dd01,id=040518008959,print=yes.html
• Notorious examples include the silver mines of Guanajuato (New Spain / Mexico) and Potosi (Upper Peru, now Bolivia)
  
• http://www.cbot.com/
• A word that is so alien to Anglosaxon finance that it is barely used in English, the Oxford dictionary defines it as a situation in which two or more different things enhance each other or form a balanced whole.
  http://www.askoxford.com/concise_oed/complementarity?view=uk
• Cumaná is the capital of the state of Sucre in Venezuela. The extraordinary ALBA TCP conference was partly as a counter-conference for the OEA meeting that same month in Port of Spain, Trinidad as the presence of Cuba was again excluded. The coast of Sucre is visible from some parts of the Island of Trinidad.