Coronavirus, confinement, crisis, rescue, spending. To that list of words we should add one more: debt.
Governments and companies, as well as many families, have gone into debt to face the worst global economic crisis in recent decades.
Some have done it because the situation is pressing. But others, are taking advantage of this era of “cheap money” thanks to the low interest rates that exist globally and the rivers of dollars that run everywhere.
Governments -through the issuance of sovereign bonds – have borrowed to pay for the gigantic fiscal expenditure caused by the pandemic, while some of The largest companies operating in the world have benefited from the easy money streak.
In economic jargon we speak of “issuing debt”, when you go out to the markets to get financing. And what large international investors do is buy that debt from you.
Unlike rich countries, Latin America has become attractive to large investment funds because offers interest higher in relation to the rest of the world.
That is the fundamental reason that explains the constant flow of private capital to the region in the midst of the crisis. And most of that flow comes from investors on Wall Street.
Between buying debt in Latin America and buying debt in the United States (such as Treasuries, for example), it is a better deal in this moment for investors to buy debt in the region, even if the risk is higher.
“Debt fever”
Elijah Oliveros -Rosen, senior economist in the Latin America Global Economics & Research division of the S&P Global Ratings consultancy, explains that currently “there is a global debt issuance fever.”
This fever has two main causes, says Oliveros-Rosen in dialogue with BBC Mundo.
The first is related to the fiscal stimulus packages that implemented by all countries to counteract the economic impact ico of the pandemic.
In emerging countries this expenditure was around 4% of the Gross Domestic Product (GDP).
The second reason is that interest rates , mainly in the richest economies, are at their lowest levels in history.
That is why many countries and companies should borrow. And that debt is not only to cover a higher level of expenses, but also to refinance previous debts .
- Why prices have not skyrocketed in the States United if the government does not stop issuing dollars
“It is the same as when you are going to refinance your home mortgage. If you get a lower interest rate, you should renegotiate the credit ”, explains the economist.
In 2020 Latin America issued government and corporate debt bonds for a value close to $ 73, 000 million dollars in international markets says Emre Tiftik, Research Director on Sustainability at the United States Institute of International Finance (IIF).
This global figure does not include debts issued by Argentina and Ecuador in 2020, due to its limited access to international debt markets.
“We have seen a greater issuance of corporate bonds, although the increase in the issuance of sovereign bonds was notable, reaching record highs,” he tells BBC Mundo.
“We are in a better economic environment”
Alberto Ramos, director of Economic Research for Latin America at the multinational investment bank Goldman Sachs, points out that economic growth is beginning to return to Latin America and that arouses the interest of investors.
“We are in a better economic environment in the region than six or nine months ago ”, Point.
And the other factor that influences Wall Street’s interest in financing the region are the low global interest rates. This causes “a great appetite to buy debt in emerging countries”, not only in Latin America.
“There are trillions of dollars with negative rates” circling the world in an environment of high liquidity, he explains , something that benefits Latin America.
Added to that are favorable prospects for commodity prices and a weaker dollar, all reasons favoring emerging economies and increasing the appetite to invest in them.
Capital flight?
Governments and companies require financing and for that, that private capital flows to the region, is an advantage, experts say. It’s like having the bank’s doors open.
“If Latin American companies can borrow with low interest rates, it’s a good thing,” says Ramos.
As the region has low levels of local savings and investment, it is important that they can obtain international financing, he points out.
The greatest risk in the current scenario is that interest rates outside the region rise or exchange rates depreciate. However, the economist explains, there are financial mechanisms to mitigate these types of risks.
The other risk mentioned by the experts consulted by BBC Mundo is that there will be a exit from capitals , that is, that large investors go to other countries in search of better returns.
What would have to happen for a capital flight to take place from the region? Basically that other markets become more attractive to invest.
In fact, the possible approval by the United States of the new stimulus package of $ 1.9 trillion dollars to mitigate the economic consequences of the pandemic, has raised the yield of US bonds in the longer term, reaching highs of almost a year ago.
The “ tantrum ”of the markets
The expectation that the fiscal stimulus package in the United States will boost economic growth and generate an increase in inflation, has caused fears that there will be a new episode of the so-called “taper tantrum”.
What was the “taper tantrum”? In 2013 There was a tantrum in the markets when the United States Federal Reserve (Fed), equivalent to the central bank of that country, began to prepare the ground for a “tapering”, or gradual withdrawal of stimuli .
That is, a reduction in their program of purchase of bonds, which meant a decrease in the purchase of debt and the massive liquidity with which the central bank had flooded the economy in previous years.
The withdrawal of stimuli and the possibility of a rise in interest rates, caused a wave of bond sales that plunged their prices and shot up profitability.
“Rates They rose very quickly in the United States, ”explains Elijah Oliveros-Rosen from the S&P consultancy.
“ Then it became less attractive to invest in emerging countries and there was capital flight from the region. ”
The market tantrum triggered volatility and generated a domino effect. The dollar appreciated against emerging currencies and both debt and stocks in those markets also fell.
Can a “taper tantrum be repeated? Despite the fact that Fed Chairman Jerome Powell has given no sign of an interest rate hike, or any reason to change the current expansionary policy, there is noise in the corridors of Wall Street .
The risk of inflation and rising rates
Investors, Market analysts and economists who postulate the theory of a new tantrum, point out that if inflation rises too fast, the Fed will have to back down and raise interest rates.
Thus, the yield of US bonds would rise and Latin America would become less attractive to investors.
The risk then is that there will be a new capital flight from the The region, which is basically less easy to obtain external financing.
Nor should we forget that beyond the external environment, there may also be domestic factors that drive capital flight in a specific country, such as political instability and uncertainty.
“At this moment the most important thing for the region is what happens with the interest rates to global level ”, points out Oliveros-Rosen.
The risk is that if inflation expectations in the US rise, the yield on US bonds will also rise.
But that is something very difficult to predict. Alberto Ramos agrees on this, and he has not seen a significant change in US monetary policy in at least a couple of years.
Anyway, says the economist, it’s good that at some point conditions change. If they don’t, it would mean that the economy is still sick .
“As the global economy recovers and leaves the pandemic behind, the things will begin to normalize. This is a sign of health, not of weakness. ”
The most direct way to anticipate an eventual capital flight, experts say, is to spend less and as much as possible, save.
Although while the economic recovery does not take hold, that is not an easy task.
Remember that you can receive notifications from BBC Mundo. Download the new version of our app and activate them so as not to miss our best content.