Latin America Fund May Provide Up to $6.8 Billion in Support

(Bloomberg) -- The Latin American Reserve Fund has the capacity to issue bonds for as much as $4.35 billion to fund loans to central banks in the region as they battle the sharpest economic downturn in decades.

The organization, which normally uses contributions from members to make loans in times of crisis, would issue the bonds in international debt markets, according to Jose Dario Uribe, president of the fund, known by its Spanish acronym FLAR. The fund is currently working on the legal and operational structure, he said.

If necessary, it can be ready to tap markets within two months, but the amount it would end up seeking will depend on the borrowing needs of its eight member countries, he said in a telephone interview from Bogota on Wednesday.

The proceeds would be added to FLAR's own financing, giving it a total of as much as $6.8 billion to lend to central banks that face balance-of-payments problems due to the impact of the coronavirus pandemic. Members, which include Colombia, Bolivia, Peru, Costa Rica, Ecuador, Paraguay, Uruguay and Venezuela, would be able to tap a five-year line of credit with a three-year grace period. Thus far, none have requested a loan, he said.

“Currently, the region is the new global epicenter of the pandemic and the contagion peak has not been reached yet,” Uribe said. “Governments in the region are trying to do their best amid the uncertainty, based on their own view of the pandemic and on the public sector funding limits faced by each country.”

More than 2.65 million people have tested positive for the disease in Latin America and the Caribbean, with deaths rising to nearly 119,000, according to a tally by Bloomberg. Lockdowns aimed at stemming the spread of the virus have crippled economies. Even as some countries start to reopen, the region faces a contraction of 9.4% this year, according to the International Monetary Fund.

Central banks have slashed policy rates and intervened in capital markets to provide liquidity. “The shock of the Covid pandemic has been unprecedented in recent history,” said Uribe, who served as the governor of Colombia's central bank from 2005 to 2017. “Central banks have responded forcefully and innovatively, using instruments they have never used before.”

FLAR most recently provided a $368.8 million line of credit to Ecuador in 2018. Moody's Investors Service, which gives the fund an investment grade Aa2 rating, in March changed its outlook to negative, citing the risk from a $436 million loan it made to the Venezuelan central bank in 2018. Since then, Venezuela paid its debt in its entirety, Uribe said.

FLAR is the latest entity to offer foreign exchange relief to Latin American central banks. The IMF has agreed to a $107 billion credit line to four countries in the region.

If FLAR decides to issue, it would be the first time since 2006 the fund has tapped international debt markets.

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