Zoellick Adopts Wall Street Tools to End World Bank Loan Slump

from Bloomberg

By Christopher Swann

World Bank President Robert Zoellick is bringing a touch of Goldman Sachs Group Inc. to rescue the poverty-fighting agency's slumping business.

The former Goldman vice chairman has concluded, after two months on the job, that the group must behave more like a Wall Street investment firm to halt a worldwide slide in lending. At stake is the bank's survival in a rising sea of private capital.

At Zoellick's direction, the agency is pushing sophisticated products such as loans that hedge against the risk of a commodity-price collapse or a surge in interest rates. His pitch is emerging as a hard sell against criticism he runs a slow-moving bureaucracy.

``Wall Street has pioneered many of the concepts and tools; the World Bank can help apply them as a package of development solutions for problems and clients that are not priorities for Wall Street,'' Zoellick said in an e-mail. ``The bank needs to be faster, better and cheaper without compromising standards. I think we can do that.''

To lure back customers, Zoellick, 54, wants the bank to offer products that countries with poorer credit profiles can't get in the private market.

He cites as an example hurricane insurance that allowed a group of Caribbean island nations to pool risk and cut premiums by 40 percent. He's trying to revive interest in financial instruments known as swaps that can protect countries from abrupt shifts in the value of their currencies. The bank is trying to be creative, too, in offering loans that would be activated in the event of a natural disaster.

Bankers' Hours

Zoellick also figured World Bank officials needed to start acting more like Wall Street bankers. He began holding daily meetings with top managers at 8:30 a.m., a start time that required some support staff to arrive at the office at 7:15 a.m. to prepare briefing papers. Zoellick's predecessor, Paul Wolfowitz, met with top managers once a week.

The World Bank, which has a $2 billion annual budget and 13,000 employees, was established 63 years ago to offer poor countries low-interest loans and grants.

For decades, the bank was the main source of capital for developing nations to build power plants, dams, roads and shipping terminals.

Now, demand is dwindling as countries such as China and Mexico burnish their credit ratings and borrow in capital markets. The bank's biggest borrowers have repaid $26 billion more than they took out in new loans during the past five years.

Finance Primers

Zoellick has dispatched bank staffers to world capitals to explain the new risk-reducing products to public officials who aren't well versed in complex finance.

The World Bank's multilingual trading floor, where traders manage a $65 billion portfolio, has been expanded recently and drawn alumni from investment banks including Goldman and UBS Securities LLC, as well as from central banks.

``There is a potential for this new approach to reinvigorate the bank's financial-services business,'' World Bank Treasurer Ken Lay said in an interview in Washington. ``By offering access to the latest risk-management tools to our clients, we can also reduce systemic risk over the next few decades.''

One doubt that emerging-market officials have raised with Zoellick's strategy is the prospect of losing out on gains should markets move sharply in their favor. Bank officials say products that lower risk are worth the price.

The World Bank has a long way to go to revive the appeal of its loans, skeptics say.

Bureaucracy Hurdles

Bureaucracy has turned customers away. On average, a borrower must fulfill 38 conditions to get a loan, ranging from privatization of industries to liberalization of trade, according to a study by Eurodad, a Brussels-based aid group.

``The problem isn't usually the lack of whiz-bang products but rather that there are too many conditions attached to loans,'' said Elizabeth Stuart, a World Bank expert in Washington at the aid group Oxfam International.

Only four countries have taken out protection against declines in their currencies -- Bulgaria, Colombia, Morocco and Mexico. None have taken advantage of the bank's ability to protect against commodity risk. Only protection against rising interest rates has proved popular.

``Countries like ours are certainly more likely to make use of the bank if they learn from Wall Street,'' Maria Agudelo, Colombia's former vice minister of finance, said in an interview. ``They need to adapt and modernize.''

Private Capital Grows

Another reason for the scarcity of customers is the loss of its biggest advantage: rock-bottom interest rates, said Adam Lerrick, a professor of economics at Carnegie Mellon University in Pittsburgh.

In 1999, the average World Bank rate on a loan was 12 percentage points cheaper than a country could borrow from international investors, Lerrick said. The difference has fallen to less than 2 percentage points, he said, because risk is receding in countries once stigmatized as unworthy of investment.

Without a new approach, the indicators aren't positive for the World Bank's survival. Net private flows to developing countries rose to $646 billion in 2006, up from $169 billion in 2002.

To contact the reporter on this story: Christopher Swann in Washington at cswann1@bloomberg.net