18 March 2010
While Moreno prays for "white smoke" at the IDB Annual Meetings in Cancun, both critics within the Bank and civil society offer sharp criticism of the leader's performance.
March 18, 2010
Source: Jens Erik Gould and Timothy Homan, Bloomberg
The Inter-American Development Bank may get $50 billion to $100 billion in funding when shareholders meet this week, according to President Luis Alberto Moreno -- as little as a third of what an advisory panel recommended for Latin America’s biggest infrastructure lender.
The panel last year said the bank needed a capital increase of up to $178 billion to sustain annual lending of $18 billion as it seeks to meet the region’s development needs.
Resistance to the increase has been growing as such member countries as the U.S. and Brazil express concern over the Washington-based IDB’s judgment in issuing loans, and the bank reported its first-ever loss of almost $1 billion in 2008 from bad bets on mortgage-backed securities. A lower capital increase may point to a lack of confidence in Moreno, said Claudio Loser, a fellow at the Inter-American Dialogue in Washington.
“If the capital increase is very small, that would show a lack of trust in Moreno,” said Loser, who was Western Hemisphere director for the International Monetary Fund from 1994 to 2002. “There are many people that aren’t happy with his administration.”
Moreno was elected IDB president in 2005. In an interview, the former Colombian ambassador to the U.S. said he has until July to decide whether to seek re-election. His current five- year term ends in October.
Until then, he said he’s focused on winning approval for the capital increase, something that may happen as early as the March 19 to 23 annual meeting in Cancun of governors from the U.S., China and 46 mostly Latin American and Caribbean states.
Hope for ‘White Smoke’
“We hope by the weekend we will have white smoke,” Moreno, 56, said in a March 16 interview in Washington.
The $50 billion to $100 billion range being discussed reflects the difficult fund-raising environment for all international financial institutions, Moreno said.
“You’re going to your shareholders in a very difficult time for them, especially given their fiscal constraints,” he said. “The fact that we are all going at the same time doesn’t make it any easier.”
The bank’s critics include officials from two of its biggest member states, the U.S. and Brazil.
“The bank isn’t fulfilling its mission,” Brazilian Minister Guido Mantega said in a press conference last month in Buenos Aires. Mantega said Brazil and Argentina would push for a “new, more efficient management” that benefits the region.
The U.S., which has a 30 percent voting share in the IDB, is hinging its support for a capital increase on the bank’s ability to improve the quality of its loans, measure its results and allocate more resources to the poorest countries, said a U.S. Treasury official, who declined to be named because the person isn’t authorized to speak on the subject.
Won’t Get Full Funding
“I don’t think the bank is going to get what they originally wanted,” said Miguel San Juan, the U.S. executive director at the bank until November 2009.
San Juan said the amount of the capital increase, unlikely to exceed $60 billion, may impact Moreno’s re-election. “Moreno is going to have an uphill battle,” he said in a phone interview from Houston.
Some shareholders praise Moreno’s leadership and say they are happy with the bank’s performance. El Salvador’s President Mauricio Funes declared his support for Moreno’s re-election this month. Former U.S. President Bill Clinton touted Moreno as “unbelievably visionary” and the IDB’s best leader ever at a bank-organized event to promote investment in Haiti last year.
“Having a change agenda means moving things,” said Moreno.
Among other reforms, Moreno said he’s strengthened anti- corruption controls, sent more bank officials into the field and designed procedures to approve loans more quickly, especially for poorer countries.
More Lending Needed
A smaller capital increase would reduce funding to the region at a time when Central American and Caribbean nations are relying on multilateral lending to help pull out of the global recession.
That is less than the up to $18 billion the bank could sustain if a “quite modest” capitalization of between $150 billion and $178 billion is approved, former Peruvian Finance Minister Pedro Pablo Kuczynski said at a press conference last year in Medellin, Colombia to present the advisory panel’s findings. A report issued later by the panel presented three scenarios for a capital increase, ranging from $74 billion to $178 billion.
The IDB took a nearly $1 billion loss in 2008 after plowing as much as 60 percent of its cash reserves into mortgage-backed securities, an unusually aggressive investment strategy that went “largely undetected” by bank officials, according to a review for the institution by Oliver Wyman, the consulting unit of New York-based insurance broker Marsh & McLennan Cos.
Bought Countrywide Securities
Among its bad bets was the purchase of two securities issued by Countrywide Financial Corp. in October 2007, after the collapse of the subprime mortgage market had already caused the now-defunct mortgage lender’s shares to plunge more than 50 percent, according the Wyman review.
The IDB approved a record $15.5 billion in loans last year. Without a capital increase -- the bank’s last one was in 1994 -- lending could fall to $7 billion annually.
Member countries have also questioned the bank’s judgment in issuing some loans. An investigating committee of Chile’s lower house called the IDB “careless and irresponsible” for making a $400 million loan to a private transportation system known as Transantiago, according to a March 10 report on multilateral lenders by U.S. Senator Richard Lugar, ranking Republican on the Foreign Relations Committee.
The loan was disbursed even as Chilean lawmakers refused to fund the project -- opposition the bank should’ve recognized, the Lugar report said. The country’s Supreme Court later ruled the loan unconstitutional and the money was repaid.
Moreno responded to the Lugar report in a March 16 letter saying the bank had improved its procedures to strengthen risk management and audit the effectiveness of loans, and had recovered a large part of the mark-to-market losses with $1.3 billion in operating income last year.
“It’s important to remember under what environment we were working, especially last year,” said Moreno, adding that all loans undergo due diligence by the IDB’s board. “Everybody, because of a financial crisis not created in Latin America, wanted the bank and all institutions like ours to be very countercyclical.”
--With assistance from Rebecca Christie and Sandrine Rastello in Washington. Editors: Joshua Goodman, Adriana Arai
To contact the reporter on this story: Jens Erik Gould in Mexico City at jgould9@bloomberg.net Timothy R. Homan in Washington at thoman1@bloomberg.net
To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net