Latin America has liquid deposits of $1,034,005 million in the rest of the world. That is to say, over a trillion US dollars.

On the other hand, the region is thirsty for dollars, whether as loans from multilateral bodies (from the hegemonic powers) or as direct foreign investment from the transnationals of the same hegemonic countries. These figures represent the greatest paradox of the old financial architecture.

We face a situation that increasingly demands a new financial architecture. If the members of the Bank of the South – Banco del Sur – had opened the institution’s doors years ago, or even one year ago, they would not have had to face the complex macroeconomic situations with geopolitical implications that they are facing today.

The countries of the region have had to give way to pressures from the World Bank (and of whoever is behind the World Bank) to make illegitimate compensation payments due to investment arbitration and they fear court rulings from the United States with respect to new investment arbitration and to vulture funds. The voice of the IMF is beginning to reverberate once again through the region with archaic bombast.

Our countries, which pushed for robust policies of public investment and endogenous development, now face pressures on their international reserves and have had to impose restrictions on imports and the movement of capital. The impact on the real economy of our peoples is foreseeable. 

The rest of the Region has taken refuge in the sad race to devaluation, due to the end of the cycle of high commodity prices.  With the increase in the level of buying power of the South American population and its tendency to consume imported goods, the outflow of foreign currency will increase, adding pressure on the reserves of the countries of the region. This pressure will not be lightened, given the re-primarization of exports (soya, hydrocarbons, minerals) from our countries at lower prices.

These impacts and the critical global situation make it ever more urgent for South American countries to once again take up the agenda of the New Regional Financial Architecture. In the short term, the statutory construction of all the pillars is not necessary, since with specific pragmatic actions absolutely tangible progress can be achieved.

While the world has abandoned orthodox positions and is going through radical transformations, in South America we still believe in the story of the old financial architecture, in spite of being nine years on from the founding Act of the Bank of the South. The IMF is promoting capital controls, debt pardon, inclusion of the renminbi in the SDR (special drawing rights) basket. The European Union formally declares the CIADI and its arbitrators as illegitimate and proposes to transfer the investment arbitration to a court designated by States. The BRICS have launched a new global financial architecture and will begin to make loans in national currencies. The Asian Infrastructure Investment Bank is now established and has proposed magnificent projects that will change the world. Bilateral currency swaps are common practice among central banks, over and beyond their obsession with AAA ratings. Moreover, all these transformations have occurred in the framework of revolutions such as bitcoin, disruptors like fintech, revelations such as the offshore leaks, gross manipulations such as the Libor rates, audits of the Federal Reserve such as that proposed by Sanders, economic sanctions such as the exclusion of Iran from Swift, rackets like those of the credit rating agencies and the return to the mainstream of the Minsky economic theories.

The member countries of the Bank of the South should live up to history by immediately prevailing over the erratic positions of middle managers, putting the Bank into operation by designating the respective authorities and making the capital contributions (barely $200 million in total during the first year). This can be done in days. Immediately they should transitorily subcontract the process of placement to a regional development bank or a national development bank. This can be done in two months.

This fiscal/external relief should be absolutely conscious in geopolitical terms and would bring a greater margin for action to the governments of our countries. Intra-regional credit would boost commerce and investment, as Brazilian and Argentinian enterprises well know. There are sufficient regional projects and many studies still to be made, from the portfolio of the COSIPLAN council of Unasur.

The Fondo del Sur (Fund of the South) is another urgent matter that can easily be established through an international trust fund administrated by the Bank of the South, as is established in its Constitutional Agreement (article 3.1.6). The international trust fund does not require a complicated juridical scheme and its rules can be made to measure according to the needs and policies of the central banks (credit rating, etc.) The Bank of the South should have the power to automatically debit payments on loans, from the accounts in the trust fund. Considering that only 5% of the resources that Latin America has invested in the rest of the world would be deposited in the Fondo del Sur, we would still be speaking of assets of 50 billion dollars.

These trust funds are nothing unusual for supranational financial bodies. The European Investment Bank (a public regional development bank) administers a variety of such trust funds (Note Z of their report) by mandate of the European Union, including the European Financial Stability Facility. The Fondo Latinoamericano de Reservas (FLAR) administers trust funds with specific mandates (article 8 of the Constitutive Agreement). This trust fund can be established in two months after the designation of the Bank of the South authorities.

A part (say 20%) of the resources of the international "Fondo del Sur" trust fund should be invested for a fixed term in the Bank of the South. Another part of the resources (another 20%) can, and should be deposited in supranational institutions (FLAR, BCIE, CAF, FONPLATA, Banco del ALBA) or in national institutions of the region (Central Banks, public banks, state-owned commercial banks and treasury certificates). All of these investments will be without any conditionality; they are freely available because they are managed as the fund’s treasury, and not as credit allocations. With these resources, it is possible to recycle the liquidity of the region within the region itself. There would be US $100 billion in fresh funds for the Bank of the South and another $10 billion for the region. The other $30 billion could still follow "orthodox, conservative and prudent" criteria, while secondary regional markets are developed. This would take four months from the creation of the Fund.

Immediately after the opening of accounts of the central banks in the Fondo del Sur, the exit of foreign currency for intra-regional trade transactions should be reduced. At present, there already exists a mechanism similar to the SUCRE that allows for saving currencies among central banks. This system is called the Reciprocal Payments and Credits Agreement of the Latin American Integration Association. The Peruvian central bank handles the accounting of this system and, at the present time, the Federal Reserve of New York settles the payments. The member countries of the Bank of the South should request the Central Reserve Bank of Peru ("agent bank") to settle the four-monthly payments through the Fondo del Sur, as the common correspondent (in conformity with article 7 of the Regulations).

Finally, the Fondo del Sur can be updated to define a new (non-physical) accounting unit: that could be an existing one such as the sucre, the Andean peso, the special drawing rights (SDRs) or a new one, such as the peso del sur.

The technical elements are resolved. What we need is the political will of the governments of the member countries of the Bank of the South, which fortunately they will need to muster in such a critical period of the global economy, when the Heads of State share common experiences this coming 27 and 28 of January, during the CELAC Summit, in Quito, which will once again will be the “Light of the Americas”.

(Translated for ALAI by Jordan Bishop)

- Andrés Arauz, Ecuadorian economist, is the Coordinating Minister of Knowledge and Human Talent.