As North America slid into economic recession in September, Venezuela’s President Hugo Chavez met with fellow Latin American leaders ‘Lula’ da Silva, Evo Morales and Rafael Correa to discuss his Banco Del Sur (Bank of the South). Advocated by Chavez and launched in December 2007, Banco Del Sur is intended as a viable alternative monetary fund for Latin American development projects. Unlike the widely discredited International Monetary Fund (IMF) and World Bank, Banco Del Sur promises credit without structural or economic reform conditions, or the social disruptions characteristic of many Inter-American Development Bank (IADB)-funded projects. Argentina – which seven years ago defaulted on $9.8 billion of IMF loans – joined Banco Del Sur at Chavez’s request, along with Brazil, Bolivia, Ecuador and Paraguay.
One year on and Banco is still ‘in the cot’, not least because members have conflicting visions for it. Venezuela and Argentina anticipate the Bank’s involvement in regional monetary policy and balance of payments finance, while Brazil – which already has its own development bank – sees Banco Del Sur servicing Latin America’s Regional Trade Agreement, known as Mercosur.
Even if members can agree on the bank’s raison d’être, there are fears that its moderate credibility will make it hard to raise money from the international markets. Its seed capital is only $7 billion which, while hefty for a regional development bank, is dwarfed by IADB, which lends at least that amount per year from total reserves of around $100 billion. Banco’s credit rating is also depressed by that of its members. Chile, which has one of the highest credit ratings in the region, is not participating.
Banco’s association with Chavez is also worrisome. Venezuela's fraught relationship with the US and evolving alliance with Iranian President Mahmoud Ahmadinejad could give many potential investors the jitters. Until it can work the international markets, Banco will only lend money invested by its members.
Global recession will have varying impacts on Banco’s prospects. On the one hand, high dependency on raw-material exports makes Latin America vulnerable to falling international demand. Oil revenues, which account for the majority of Venezuela’s export earnings, may decline. Such developments could, in turn, limit member investments. Yet Argentine bank BBVA claims that high capital reserves and generally low indebtedness may help Latin America avoid the worst effects of recession. In November, Brazil’s two largest banks – Itau and Unibanco – merged to become the sixth biggest bank in the Americas, worth $41.3 billion. As the financial world order attempts to rebuild and cash seeks new places to alight, there could well be a stall for Banco Del Sur in the new market.