SANTIAGO, Chile - At the annual Inter-American Development Bank (IDB) conference in Santiago, Chile last month, debate whipped through a seminar as one speaker suggested that the IDB should increase lending to Latin American countries in order to ease the currently high spreads and lending rates.

The seminar, pertaining to the stunted growth throughout Latin America and the Caribbean and addressing what the governments can do to facilitate the region, was enlivened with the seemingly expected "provocative" statements from Ricardo Hausmann, professor of economic development at the Kennedy School of Government at Harvard University.

Hausmann said borrowing at high interest rates increases the debt burden for Latin American countries and it becomes a harder debt for them to pay back. And, with the current status of spreads, Hausmann said it is irresponsible for Latin American countries to borrow: "It is like a poison pill...these spreads are not sustainable - so either they come down or countries will go broke," said Hausmann.

As a solution, Hausmann said the IDB should increase lending more than its current financial lending policies imply. "The IDB should take a more aggressive policy and instead of having a target lending policy rate of $7 billion a year, they could move to a higher lending level," said Hausmann. "I believe that the IDB is financially capable of doing that even though its financial rules do not allow it."

The IDB is currently lending at Treasurys + 100 basis points.

Hausmann said the capital markets are not functioning, partially as a result of the sovereign risk involved with the countries in the region. "Sovereign risk means that the markets are too thin, and too costly, and too fickle."

Additionally, he argued that the World Bank policies tend to focus more on moral hazard rather than on sovereign risk. "A lot has been done to tackle moral hazard, very little has been done to tackle sovereign risk."

Hausmann argued that in the absence of a solution to sovereign risk, multilateral agencies are, in a way, a solution to that problem. They have a better ability to get repaid from sovereigns. And in fact, these banks have been lending for 50 years and they have been repaid without requiring any debt forgiveness that has not been cupped by their normal spreads.

Going forward, Hausmann added, "The big challenge is to securitize, to act in the markets. I think that the securitization market will have to be designed so that it is traded internationally. These markets are too small and too illiquid to support anything. There is a natural tendency for markets to become monopolies."

Thus far, Hausmann added, "Latin America is a failed attempt at developing local capital markets."

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