IADB looks to ease LatAm credit crunch

RIO DE JANEIRO, Dec. 19 (UPI) -- The Inter-American Development Bank will provide $1 billion in loans to banks in Latin America to relieve the severe credit crunch the region is facing, a Brazilian newspaper reported on its Web site Thursday.

Estado de Sao Paulo reports that the credit program will become available in a month, after it receives approval from IADB's member countries.

The $1 billion program will be used by IADB to make direct, short-term loans, and to support the lending activity of private commercial banks and other lenders.

Banks would be able to receive 5-year loans at IADB's annual interest rate of 5.27 percent. That money would have to be used to extend loans of 6 months to 1 year to exporters and importers in the region, two sectors hardest hit as international credit has withered in Latin America.

In Brazil, where some international banks have slashed credit by up to 20 percent, exporters say they have had to cut production and postpone expansion projects because they cannot get loans.

Martus Tavares, Brazil's representative to the IADB, told the newspaper he applauds the entity's entrance into financing trade.

"One of the most important aspects of this new program is that it allows a pre-cyclical intervention, maintaining access for countries to resources of import and export financing in moments of difficulty," Tavares said.

International credit to Brazil dried up this year as a presidential election sent shockwaves through the market. The local currency plunged as much as 40 percent, the main stock index crashed and Brazil's country risk factor spiked.

But pragmatic action by President-elect Luiz Inacio Lula da Silva has brought some calm to the country, as the local currency hit a three-month high on Thursday, trading late in the day at 3.47 to the dollar.

The currency has gained nearly 8 percent in five days.

But international lenders seem to be holding out until Lula -- as the president-elect is known -- actually takes office on Jan. 1. The actions taken in the first months after he is in power will largely determine if Brazilian companies will see some fresh cash.

Brazil did receive a boost of confidence on Thursday from the International Monetary Fund, which has itself deeply tied into the country in the form of a $30 billion bailout package.

The IMF approved its first performance review of Brazil, allowing the country to draw down $3 billion before the end of the year, which authorities say they will do.

Brazil already received a disbursement of $3 billion, with the remaining $24 billion available next year.

"Brazil's performance under its stand-by arrangement with the Fund has so far been exemplary, and all performance criteria and structural benchmarks have been achieved," IMF Managing Director Horst Kohler said in a prepared statement Thursday, one day after the IMF approved the review.

"Building on this solid record, and the incoming administration's commitment to maintain the sound fiscal and monetary policies of recent years, the Fund looks forward to a close and productive cooperation with the authorities in implementing their policy agenda in the period ahead," Kohler continued.

Kohler noted that despite recent improvements in Brazil's markets, tough times lay ahead. But, he said Lula's naming of a moderate economic team is providing reassurances about future policy.

Despite recent surges in inflation, Kohler said the central bank had acted smartly by increasing a key interest rate by 3 percentage points to 25 percent on Wednesday.

"The restoration of confidence is expected to lead to a decline in inflation over the next several months," Kohler said.

Incoming central bank President Henrique Meirelles further helped calm the markets on Thursday, when he told reporters that no sharp policy changes will be seen, and that fighting inflation will be priority No. 1.

Forecasts for high inflation "are going to change," Meirelles said, "because the government's commitment to bringing stability to prices is clear."

He also said that the central bank will have the autonomy to enact policies it deems necessary to fight inflation.