External debt: Latin America, in the hands of Wall Street | Economy

The majority in Latin America suffer economic poverty and are among the social groups most exposed to the coronavirus.
The majority in Latin America suffer economic poverty and are among the social groups most exposed to the coronavirus.JUAN PONCE VALENZUELA (EFE)

Sitting in front of a Costa Rican flag and staring, President Carlos Alvarado did not hold back in expressing his frustration with the global financial system. “Other actors have a responsibility to support financing for our region,” he said at a virtual event organized by various multilateral institutions this month. “The pandemic has been clear that we are not well until we are all well,” he added.

Latin America is the most indebted emerging region in the world. According to data from the Economic Commission for Latin America and the Caribbean (ECLAC), gross debt of governments averages 77.7% of regional gross domestic product (GDP), and total debt service, that is, its interests represent 59% of exports of goods and services. Much of this debt is market debt: it was made through the placement of bonds in the international market, with the large banks and investment funds on Wall Street as its main buyers. By “other actors”, Alvarado was presumably referring to governments of developed countries and not just the private banks that operate there.

Despite the extraordinary circumstances of the pandemic and, unlike financing, which can be done with multilaterals or directly from other governments, market debt is a business. Its sole function is to generate income from buyers and the interest rates that the debtor will pay are subject to a rating by independent credit agencies. These, Alvarado also pointed out, have been unfair to his country and to others in Latin America, by refusing to adapt their methodologies to the pandemic.

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“The risk rating agencies have not treated us, they have mistreated us, even if we do things responsibly,” said Alvarado at the event organized by ECLAC together with the Organization for Economic Cooperation and Development (OECD), the Development Bank of Latin America (CAF) and the European Commission on December 2, where he shared the stage with his counterparts in Colombia and Ecuador. “Our fiscal margins in these times of pandemic are looking increasingly narrow. In the pandemic we had less growth, more expenditures, and therefore, more pressure. We had no respite from the qualifiers and I always celebrate the courage that [el presidente de Colombia] Ivan [Duque] He has had to say it clearly ”, said Alvarado.

The sentiment of the Central American president echoes throughout the region. During 2020, due to the need to stimulate economies, the debt reached unprecedented levels and it was time to pay. The Federal Reserve in the United States, its equivalent to the central bank, has sent signals that it will start raising its interest rates in 2022 to contain inflation and gradually return to a more orthodox monetary policy. This is what has Latin American presidents so concerned. A rise by the Fed, as it is known, could raise interest rates on its debt and could also trigger an outflow of foreign capital from their countries, which would affect their exchange rate and, therefore, their payment. debt in dollars or other foreign currency.

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In addition, there will be a slowdown in their economies. Fitch Ratings expects most countries in Latin America to slow down in 2022 after their economic reopening and recovery in 2021 from shock Covid-19 of 2020. Likewise, external conditions are expected to be less favorable, as the US and China will grow more slowly. “The fiscal deficit remains quite high, close to 5% of GDP on average, reflecting the need for several countries to apply structural fiscal measures to stabilize the growing debt burden. The social and political environment makes rapid fiscal consolidation difficult, ”analysts from the rating agency said in a report.

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Almost a third of Latin America’s sovereign ratings are on a “negative outlook” and none have a “positive outlook,” according to Fitch. Panama, Peru, Suriname and Colombia lost their investment grade this year, which guarantees better interest rates. The relationship between public debt and taxes, an approximate indicator of the financial capacity of countries to pay public debt, has been increasing in recent years, from 223% in 2007 to 320% in 2019, says Sebastián Nieto, chief of the OECD for the region. In 2020, global debt reached $ 226 trillion, its largest annual increase since World War II. The difference is that after the war most of this debt was from government to government, and not from private banks to governments.

“We insist a lot on the need to look for mechanisms, such as special drawing rights, yes, but also other types of vehicles that help finance the debt that has been acquired to stop this crisis,” says the economist on the phone from Paris. “But, in our opinion, a well-coordinated form at the international level, putting all the multilateral actors on the table is not enough because, as we know, a part of the creditors are private and therefore it is also necessary to seat the parties. different institutional investors and international financial institutions ”.

However, at this time, there is no effort or leadership reaching out to Wall Street. The presidents of the region agreed that new ways to finance themselves should be sought during the Ibero-American Summit this year, but no one took the lead.

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Part of the strategy should be to spend better, says René Orozco, a macroeconomic policy analyst at the OECD. The spending made by the Brazilian government for the pandemic, for example, helped lift millions out of poverty, making it a good investment. “Here the multiplier is greater than one,” says Orozco. “So, we are not only talking about containing the crisis, but also about development. It is a matter of thinking about how we make this crisis less painful, but also take advantage of it to get out of these structural challenges ”.

While governments decide how to meet their obligations, both with citizens and with Wall Street, the region prepares for a super electoral cycle in which the future of the new generations will be defined. In this, Alvarado also had a message for developed countries: “If we monopolize development financing, I can feel the selfish notion that the resources are for mine, but we are going to see radicalized phenomena such as migration, organized crime, inequality and political instability that will affect the economy, trade, output added to the world of the region. We have to make that call in terms of financing ”.

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George Holan

George Holan is chief editor at Plainsmen Post and has articles published in many notable publications in the last decade.

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