Ecuador Wants `Fund of the South' to Back Regional Currency

By Stephan Kueffner

Dec. 15 (Bloomberg) -- Ecuador's President Rafael Correa wants Latin American countries to merge repatriated offshore assets in a fund that would back a proposed regional currency.

Correa, with five other South American leaders, on Dec. 9 signed off on a joint development bank, the Bank of the South, promoted by Venezuelan President Hugo Chavez to counter the influence of institutions like the International Monetary Fund and the World Bank.

``The Bank of the South is an important step but the next step is missing, to create a Fund of the South, a fund that will bring back all those funds that Latin America, particularly South America, holds outside its borders, close to $250 billion, to serve as a backing in the case of financial and balance of payments crises,'' said Correa today in his weekly radio address.

The fund could be used to support countries in the event of crises, its returns could be used to fund investments in infrastructure, and its assets could serve to back a regional currency from Mexico to Patagonia, he added.

Rather than booking transactions in U.S. dollars, the countries in the region could use a transaction unit backed by such a fund. ``That's the first step to later have a currency, the latino,'' said Correa.

Latin American central banks and other government institution hold investments overseas, like U.S. Treasuries. Correa and Chavez want to bring them back to make them available for local economies.

Unified Currency

Correa, the 44-year-old economist who studied in Belgium and the U.S., has been one of the most vocal supporters of a unified Latin American or South American currency. At the same time, he acknowledged the obstacles facing the creation of a joint currency in the region.

``Obviously, a lot of institutions are missing before we can have a common currency, but we must head in that direction,'' said Correa, a critic of Ecuador's use of the dollar as a domestic currency in the year 2000. He has pledged to keep the dollar as the Andean country's currency before a unified Latin American currency is introduced.

The Bank of the South's members have yet to define how much capital each country will provide for the bank.

Correa reiterated his criticism of the central bank's holding of close to $4 billion foreign currency reserves offshore, rather than within Ecuador, where he said they could be used to finance investment. While officials close to his 11-month old administration control the bank, he wants its nominal independence scrapped in the rewriting of the constitution currently under way. Ecuador has the region's lowest annual inflation rate at 2.7 percent as of November.