In mid-October, Latin America’s regional financial institutions moved rapidly to ward off a potential financial tsunami. A $9.3 billion liquidity line launched by the Inter-American Development Bank ($6 billion), the Andean Development Corp. ($1.5 billion) and the Latin American Reserve Fund ($1.8 billion) will be extended to governments that will then lend to commercial banks to keep credit flowing to exporters and businesses.
But liquidity in a pinch comes at a steep price: The terms for the funds are LIBOR plus 400 basis points to be reset every six months. Higher than for a typical International Monetary Fund loan, the rate could work for small countries that lack investment-grade ratings and must borrow at significantly higher spreads than can Brazil, Chile, Mexico and Peru. The funds will be available to countries that don’t have an agreement with the IMF and won’t come with onerous conditions on fiscal and monetary policy, says Nora Lustig, former director of poverty groups at the United Nations Development Program and the IDB. That makes the credit line “the right kind of instrument,” she says. The three agencies pledged last month to boost their combined lending in 2009 to as much as $30 billion to support government projects, financial institutions and social programs.
