The chicha calm that reigns these days in the Latin American public debt markets hides a paradox of the first order. While the hurricane-force winds of the pandemic rage against the macroeconomy, the main countries of the region continue to emit at historic minimum interest rates. Few would have bet on the region’s big five — Brazil, Mexico, Colombia, Chile and Peru; Argentina on the sidelines – they would be today, just two months away from this unfortunate 2020 raising the curtain, paying historic minimum interest on its debt. But, for its fortune and that of its treasuries – more in need of resources than ever – global liquidity is winning the game by a landslide against the sanitary typhoon on the real economy.
A cocktail of factors is easing the heavy slab on which Latin America – and the world – will emerge from this unprecedented recession. The debt bazaar has been anesthetized for months in rich countries by the grace of central banks – most countries and large European and American companies pay practically nothing to finance themselves – the lack of profitability has led thousands of investors to seek other ports , away from New York, London, Paris or Madrid, even if it is at the cost of taking greater risks.
This is where the Latin American countries exhibit much more attractive credentials: lending to the big five of the bloc for 10 years income between 2.5% (Chile) and almost 8% (Brazil). In between, Peru – which is on the way to the second largest recession in the region this year, after Venezuela – pays just over 4% and Colombia and Mexico, around 6%. Even at or very close to all-time lows, these figures look much more attractive to fixed income investors than those found in Europe or the United States, and it is this rush of money to the region that is managing to keep the spreads.
In the secretariats (ministries) of Finance of the region, from Santiago de Chile to Mexico City, these days breathe moderately relieved: the challenges are enormous, but the good reception of the market to its emissions is being an oxygen balloon as powerful as unexpected when the coronavirus storm hit. In March, capital outflows became the norm in emerging countries and Latin America was no exception. The subcontinent, led by Brazil, was in the eye of the hurricane, not only epidemiologically but also on investors’ radar: risk aversion was a constant and the debt of developing nations, in short , retro wade. But this total closure of the credit tap did not last long: if in previous crises you had to wait months or even years, this time it was a matter of a few weeks.
In parallel, the worst macroeconomic omens have come true: GDP plummeted in the second quarter, and the rebound in the third and fourth can only mask a recession that will go down in the history books. But the trickle of emissions at low rates – mostly in dollars, yes – has returned as if the coronavirus had been just a bad dream. “Before the pandemic, we were already coming from a global environment of low interest rates, and the expansive policy of the Fed and the ECB and the signal that they will continue to support the financial markets have helped a lot,” the strong man explains to EL PAÍS from the International Monetary Fund for Latin America, Alejandro Werner.
“It is a continuation of the appetite for risk that foreign investors have, even though the fall in GDP is one of the deepest in the region,” the chief economist of the Inter-American Development Bank (IDB), Eric Parrado, diagnosed by telephone. At the end of the day, he says, “what foreign investors are seeing is a shock global, not inherent to Latin America and the Caribbean or emerging countries. And that is, will be, temporary: its end will be the vaccine. It is a parenthesis: they see that the recovery will come soon.
Not everything is attributable to the external factor: if in previous crises the central banks of the region were handcuffed by internal instability and external distrust, this time they have fearlessly donned the Superman cape: they have fearlessly crossed the border of heterodoxy —Large-scale liquidity injections; debt purchases in the secondary market… – and they have made life easy for governments. 20 or 30 years ago the history of this crisis would have been quite different, at least in the purely financial sphere: the specter of devaluation and inflation would have squeezed hard and inhibited any monetary stimulus. “But not now: solid fiscal and monetary institutions have been developed, and most autonomous central banks are autonomous and have a clear commitment to price stability,” he slides. Martin Castellano, responsible for analysis for Latin America at the Institute of International Finance (IIF, the global banking association). “All of this is allowing them to be more aggressive, making public sector financing even cheaper.”
Cheap debt is also a historic opportunity for states, and an invitation in gold letters to borrow more. “There is a huge need to reactivate the economy and support families, and it would be good to take advantage of it to emit more”, ditch Stephany Griffith-Jones, a researcher at Columbia University specialized in Latin America. “However, they cannot be trusted: it all depends on the famous animal spirits of [John Maynard] Keynes, the irrational factor of markets. And, if the yields in developed countries were to rise for anything, there would be an exodus in reverse ”. The direction of the wind, the region well knows, can change at any time.