Cecilia Vera

Un Fondo de Reservas Regional para América Latina (A Regional Reserve Fund for Latin America)

This paper analizes and presents empirical evidence on the feasibility, implications and challenges of an expansion of the Latin American Reserve Fund (FLAR) to cover twelve countries (Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Costa Rica, Mexico, Peru, Paraguay, Uruguay and Venezuela). The paper argues that a regional reserve fund for these twelve countries should not be conceived as a unique line of defense but rather as part of a wider set of support mechanisms to which countries may resort to confront Balance of Payments difficulties. In order to estimate the possible size of a Fund for the twelve countries, we begin from the premise that regional reserve funds are one of the various mechanisms of the international financial architecture. As a result the size of Fund can be smaller than one built on the idea of a lender of last resort to all its members. In this sense the Fund should not necessarily cover extreme scenarios such as systemic crises or generalized contagion. It should be calibrated to cover the most likely scenarios (according to our results those in which only a fraction of members present simultaneous Balance of Payments problems). A fund calibrated to cover the most likely scenarios is within manageable ranges – between 9 and 10 billion dollars, representing on average between 1.4% and 1.7% of countries’ international reserves – depending on the scenario considered. A Fund of this size could cover a significant share of potential financing requirements of members but, in case of necessity, it should have the capacity to enlarge its pool of resources through other mechanisms of the international financial architecture. One of the main challenges of an extended fund is to reconcile the sense of ownership felt by member states and flexible/timely liquidity allocation with sound surveillance and participative decision making.