Banco del Sur launch -- Higher U.S. interest rates

June 27, 2007

Venezuelan President Hugo Chavez is using oil dollars to replace the IMF in South America. Banco del Sur (Bank of the South) will be launched in July to finance infrastructure projects like the $20 billion Gasoducto del Sur gas pipeline which will run from Bolivia to Argentina. Venezuela has committed $1.4 billion to the Bank, as will each member country. So far, Brazil, Argentina, Ecuador, Bolivia, Nicaragua and Paraguay have committed funding, while Peru and Chile are undecided. (Source: Global Finance, “Chavez Banks on Regional Support,” May 2007; Financial Times, “Could Banco del Sur spell the end of the IDB?”, May 7, 2007; Center for International Finance and Development, June 22, 2007)

What the Banco del Sur launch means:
Chavez’s intention is for the Banco del Sur to replace the IMF and the Inter-American Development Bank (IDB) in Latin America. Ecuador’s President Rafael Correra has said that Latin American governments have $200 billion in foreign currency reserves invested outside of the region.

Banco del Sur will further reduce the influence of the IMF in Latin America. IMF loans to Latin America have decreased from 80% of its portfolio to less 1% as countries like Venezuela and Argentina have repaid their loans. Chavez has accelerated this trend, loaning Argentina the $5 billion it needed to pay off the IMF. (Source: Global Finance, “A Bumpy Ride,” May 2007)

Chavez and his allies say that these U.S. backed institutions are a means of influencing the economics and politics of the area. The IMF forced privatizations of the oil industry in Venezuela in the early 1990’s as part of its loan requirements. In response, Chavez was elected on a platform of restoring the profits of these natural resources to local control, which he accomplished last year. The IDB has been accused of funding infrastructure development, like the Cana Brava Dam, which destroys local communities and then environment to benefit multi-nationals.

The establishment of Banco del Sur means that these Latin American countries have joined the global trend away from U.S. Treasury bond investment. Latin American countries hold over $93 billion, so their withdrawal would put downward pressure on demand for U.S. bonds, thus raising interest rates. (Source: BiCeca, “Belo Horizonte: IDB annual meeting tip sheet," March 28, 2007; U.S. Treasury, “Foreign Holdings of U.S. Treasuries," May 2007)

Action steps:
Higher U.S. interest rates mean a slower economy, especially in the housing market. This means the value of your home could decline. The best protection is a well-diversified portfolio that includes REIT's. Find out how to protect yourself with my home study course, “Retirement Planning 101.” This course will guide you using the same steps I took to retire at age 50.

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