Bloomberg News

IMF’s Lagarde Seeks Latin America Help in ‘Historic About-Turn’

November 30, 2011

Nov. 28 (Bloomberg) -- International Monetary Fund chief Christine Lagarde will seek support from Latin America’s largest economies this week to help contain Europe’s mounting debt crisis.

Her first visit to Latin America since taking office in July marks a role reversal for a region that harbors deep-seated resentment over decades of IMF-imposed austerity measures, said Roberto Abdenur, a former Brazilian ambassador to the U.S.

“Previously local authorities trembled when even the most junior IMF official visited,” Abdenur said in a telephone interview. “Today, the chief is coming to seek aid. It’s an historic about-turn.”

Struggling with repeated crises until just over a decade ago, Latin America today helps drive global growth with expansion forecast at 4.5 percent this year, compared with 1.6 percent for developed nations, according to the IMF. Lagarde wants to tap the new-found wealth of Brazil and Mexico to beef up the fund’s resources to contain the debt crisis, while placating their demands for a larger say at the institution.

Many in Latin America wanted to break with the tradition of choosing a European national to head the IMF, with several countries supporting Lagarde’s main rival for the post, Mexico’s central bank chief Agustin Carstens.

“She realizes the importance of having good relations with these countries,” said John Williamson, senior fellow at the Peterson Institute for International Economics in Washington DC.

Broader Effort

The trip by the 55-year old former French finance minister, which kicks off in Peru today, is part of a broader effort that included visits to Russia, China and Japan to secure bilateral loans to the IMF as a way to help Europe, said Nancy Birdsall, president of the Washington-based Center for Global Development, an aid research group.

“It’s a very good thing she’s doing this because you have to have the leadership on the management side, kind of corralling and persuading,” Birdsall said.

With about $390 billion currently available for lending, the Washington-based IMF may not have enough money to meet demand, Lagarde has said.

The institution is preparing a 600 billion euro ($794 billion) loan for Italy in case the debt burden worsens, La Stampa reported yesterday, without saying where it got the information. The loan would give Prime Minister Mario Monti 12 to 18 months to implement his reforms without having to refinance the country’s existing debt, the newspaper said.

Since late July global stock markets have lost more than $9 trillion. In a sign of growing contagion from the euro-region debt crisis, the yield on Germany’s 10-year bond, long considered a haven, climbed to 2.26 percent on Nov. 25, keeping the gap to U.S. Treasuries near a 30-month high.

Influence

Mexico and Brazil, which alone has more than $350 billion in international reserves, have said they are willing to do their part provided Europe boosted its own rescue efforts.

“We’re open to the discussion and we’ll try to be helpful,” Mexican Deputy Finance Minister Gerardo Rodriguez said in an interview at the G20-meeting in Cannes, France, on Nov. 4. “It is in the hands of the Europeans however to come up with more specifics on the solutions and an additional effort.”

Things were very different ten years ago when Argentina declared the then largest sovereign debt default after months of dispute with the IMF in an economic crisis that brought down four presidents in two weeks.

Lost Decade

In 2002, Brazil’s financial markets went into tailspin as Luiz Inacio Lula da Silva rose in opinion polls on concern the former union leader would go on a spending spree once in office. Spreads on Brazil’s sovereign bonds over their U.S. counterparts spiked at 2400 basis points. Yet, as president, Lula converted Brazil from an IMF debtor into a creditor.

Back in the 1980s, so many Latin American countries defaulted on their debt it became known as the lost decade for the region.

Now, as their economic weight increases, Brazil and the other so-called BRICS nations of Russia, India, China and South Africa, want reassurances that the IMF will push ahead with changes to quotas, which determine a member country’s voting rights and access to IMF funding.

“We want to know the plans for the next steps in the IMF governance reform, which is the discussion on the formula for calculating quotas,” Carlos Cozendey, the Brazilian Finance Ministry’s international affairs secretary, said by phone.

With many European countries still hesitant to yield power at the IMF, Lagarde will be unlikely to make specific pledges in her meetings with the presidents and economic officials of the three countries.

“She can express her desire for reform but it still needs to be approved by the board, where the Europeans carry a lot of weight,” said the Peterson Institute’s Williamson.

--Editors: Philip Sanders

To contact the reporters on this story: Raymond Colitt in Brasilia at rcolitt@bloomberg.net; Sandrine Rastello in Washington at srastello@bloomberg.net.

To contact the editor responsible for this story: Philip Sanders in Santiago at psanders@bloomberg.net.


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