International investment bankers working with Latin American governments have not much to do at the moment. This is why a global publication such as the good old The Banker from the Financial Times Group published an article this month which explores the possibilities for business that are left. It is entitled “Foraging for yield from scarce sovereign bonds” (it will be available for free online from April; free subscription to the website).
The article actually tells us good news: Given most of Latin America’s buoyant (but dangerously commodity-dependent) economies, general better macroeconomic management and the tendency of many governments to get rid of external debt after the financial crises in 1997-2001 (see a past post on emerging market crisis),“governments (…) have little need for much bond funding at all, and those that (run fiscal deficits) are switching to local currency markets”.
“Spreads on outstanding external bonds held by governments have mostly compressed to such levels that they scarcely resemble an emerging market asset class at all”, writes The Banker. In normal parlance this means that the price of borrowing for most Latin American countries has reached such low levels, that they almost would no longer need to be classified as “emerging markets”, which pay higher “risk premia” (or rates) on their international borrowings given that they are considered more risky.
In this context, to keep themselves going, banks involved in big government deals in the past and victims of the last financial crises such as in Brazil or Argentina, discover other ways of entering Latin America’s public debt business. In countries like Colombia or Brazil which currently issue public debt locally, international investors have started to buy government paper in local currencies. Hedge funds buy into parts of Argentina’s remaining distressed debt. New types of deals are done with governments that just “reprofile” their debt to make it more sustainable and easily manageable, such as recently done by Uruguay.
The article mentions the possible trouble looming ahead: the way Ecuador could handle its potential foreign debt restructuring (again, a recent post on this topic can give more background), inflationary pressures in an Argentinian economy that is overall doing quite well at the moment, and weak economic performance in Brazil. But The Banker writes that a potential crisis emerging, say, in Ecuador is “unlikely to cause any contagion for bondholders in the rest of the region.” And a Credit Suisse banker quoted in the article says:
“The balance sheets of Latin American governments are so much stronger that any crisis will be much briefer and there will be more differentiation among countries”.
The recent international stock market turmoil was triggered by fears over China’s economy and stock market performance, over the US economy, and over the Japanese currency. If there is a major financial crisis happening again, then it will probably come from those giants, rather than from Argentina. But this doesn’t mean that Latin American economies can lie back and do nothing and think they can “boom a little” while commodity prices are high. It’s the right moment to do something about creating the right conditions to put their poor on the track to prosperity.