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Spain warns of the risk of sovereign debt crisis in Latin America

Protests in Buenos Aires against the International Monetary Fund, in August 2018.David Fernández / EFE

The pandemic has a strong impact on the side there: with the collapse of GDP, per capita income in Latin America has fallen a decade, and extreme poverty is at levels of the nineties, no less. Europe was never the best place to feel optimistic about Latin America, and Spain may not be either: the Executive warns in an internal document of the risk of an “unmanageable” debt crisis. Spanish diplomacy paints a gloomy socioeconomic picture. Given the scarce fiscal and monetary margin in the region, Spain is committed to opening multilateral financing lines to avoid greater evils.

The IMF, the World Bank and the ECLAC forecast GDP falls of around 8% this year: that bump has revived the Latin American curse of the lost decade. By the end of 2020, there will be 214 million poor people in the region, more than a third of the population, and 83 million people are expected to fall into extreme poverty, a statistical artifice that puts the threshold at an income below 1.9 dollars a day: that’s a bitter return to the very forgettable 1990s. The migration crisis is unprecedented. Inequality reaches dizzying heights. Corruption and outbreaks of violence remain the order of the day. And the hyperbole outlined by socioeconomic data is joined by socio-political trends, with a malaise that is reflected in levels of dissatisfaction with democracy that have gone from 51% to 71%, the worst numbers in a quarter of a century. This lasagna of figures and complexities leaves the region exposed to its old ghosts: Spain, in this document of just a dozen juicy pages, alludes to the “risk of a new sovereign debt crisis and a prolonged cycle of austerity policies.” The adjustments, which have already begun in some country, “may aggravate the social fractures” if a multilateral response is not arbitrated, which Spain offers to lead.

“In addition to health challenges, countries in the region may have difficulties in obtaining financing. There is neither a Federal Reserve nor a European Central Bank for them: beyond the market, their capacity will depend on the answers that international financial institutions can give, ”explained the Secretary of State for Foreign Affairs and Latin America, Cristina last Thursday. Gallach.

With the permission of Eduardo Galeano, writing about Latin American economic policy requires “the style of a romance or pirate novel.” In Central and South America, economic piracy is in poor health: debt crises happen every 10 years –roughly– and there always seems to be a lost decade around the corner. The metrics of the current hurricane compare nicely with those of the Great Depression, which left an ugly scar in those latitudes, or with the formidable debt crisis of the 1980s. But back in 2008, with Lehman Brothers putting the world in a quagmire, the global economy was living a love affair with Latin America: the region came from a very good five years, which only played in 2009 but quickly recovered with the invaluable help of the supercycle of raw materials and from China. That honeymoon gave way to the inescapable pirate novel: the region limped into the pandemic, with a peg leg in the form of a five-year crisis.

The covid also threatens to sever the good leg. “Health, economic and social crises occur in a fragmented and polarized political scenario, with low levels of trust in institutions and high citizen disaffection, fragile economies and high levels of inequality, poverty and exclusion that can cause social unrest and political crises. deep ”, according to the diagnosis of the aforementioned document, to which EL PAÍS has had access. The medical picture combines social unrest — there have been riots in Chile, Colombia, Ecuador, Nicaragua, Venezuela — and political volatility, in which sharp turns (Mexico, Argentina) and various leaders with authoritarian tendencies are mixed. Spain, yes, applauds the recent episodes in Chile and Bolivia: not everything was going to be bad news.

The economic flank is a real headache. Before the pandemic, Argentina and Ecuador were already implementing IMF-sponsored adjustment programs. “In the current situation, an important part of the region can be forced to face unmanageable debt crises,” according to Foreign Affairs. This would once again highlight the lack of a multilateral mechanism to restructure debts, which recognizes “both the rights of creditors and the needs of indebted countries” and avoids “opportunistic funds”.

Spain, with great interests in the area, denounces an “insufficient multilateral response”: the debt moratorium agreed at the G20 only covers the 76 poorest countries in the world, which leaves out the vast majority of Latin America. The Government will put forward proposals both in the IMF and in the G20 itself to find solutions: “It seeks to prevent the health crisis from leading to a debt crisis of great proportions.” Among the recipes that Spain contemplates are an extraordinary issuance of special drawing rights (the capital of the IMF, a solution complicated by the US blockade) or the possibility that the Fund uses in America the margin that it has for Europe if the Old Continent doesn’t need it. Also proposed are “broad moratoriums” and the easing of liquidity lines from the IMF and multilateral development banks. Spain is not sparing proposals that can raise blisters, such as “a greater fiscal effort by the elites of each country.”

Nuanced pessimism

That analysis dates from last June. The Executive has recently qualified the pessimistic tone of the report: the number two of Foreign Affairs, Cristina Gallach, predicted last week “difficulties in several countries to face financing problems”, although she avoided mentioning the cursed phrase debt crisis. José Antonio Ocampo, from Columbia, admits that the impact of the pandemic has been “very strong” but does not share the gloomiest analyzes: “The restructurings in Argentina and Ecuador worked and there are IMF credit lines in several countries. And most importantly: unlike other times, the closing of the markets lasted just a couple of months. There may be specific problems if the health crisis continues, but Latin America is not doing any worse than southern Europe ”, he closes with an irony that works at the same time as an uncomfortable truth.

The fractures of the postcovid world

The Foreign Affairs document raises from its inception “initiatives and concerted actions in the G20 and other forums in order to facilitate access to financing and debt relief in the face of the crisis”, but goes much further: Spain intends to strengthen its diplomatic strategy in the region – it has two visits planned shortly: to Chile and Bolivia – and above all it wants to strengthen the role of the EU in Latin America, in the face of fierce geopolitical competition from China and the United States. “Latin America may be one of the scenarios in which some of the key fractures of the post-covid world will be resolved: nationalism or global cooperation; open or closed, democratic or authoritarian societies; and on the role of Spain and the EU in a world of growing geopolitical competition ”, points out the report of the Spanish Executive, which confirms that the EU is a“ not very relevant ”actor in the region.

To regain influence, Spain proposes to improve the treatment of Latin America in the Multiannual Financial Framework, the EU budget. Foreign Affairs intends to play “a more active role in regional crises, particularly in Venezuela”, and plans to increase resources “so that the Spanish cooperation strategy regains credibility and capacity.”

Spain confirms the crisis in regional cooperation initiatives: Unasur has dismantled itself; Celac has been paralyzed since 2017 and projects such as the Organization of American States (OAS), Prosur or the Lima Group “have no credibility or autonomy due to their alignment with the United States.” The Pacific Alliance “has lost its original appeal” and in Mercosur “there are tensions over the confrontation between Brazil and Argentina”, although Spain urges the provisional entry into force of the EU-Mercosur agreement.