Moody's official says Latam faces liquidity crunch
Reuters, Friday, September 04, 1998 at 13:01
By Apu Sikri
NEW YORK, Sept 4 (Reuters) - A rapid decline in investor
confidence in emerging market countries prompted Moody's
Investors Service Inc. to cut its ratings of two Latin American
countries, a senior Moody's official said on Friday.
"The overall liquidity situation may in fact be difficult
for a longer period of time and, as a result, the stresses on
the system this time around may be different than they were in
1995," said Vincent Truglia, managing director and co-head of
the sovereign risk unit at Moody's. "As a result, countries
with large financing needs may be facing a more risky
environment."
Moody's on Wednesday cut ratings for Brazil and Venezuela
and put Mexico and Argentina on review for possible downgrades.
Moody's action sparked criticism from Latin American
finance ministers who said the agency was being overly alarmist
about the situation.
But Truglia said the crisis sparked in emerging markets
this time could be more severe than that faced by these
countries in 1995, when a devaluation of the peso sparked large
scale selling of the bonds of many of these countries.
"In 1995, you had a drying up of liquidity because of fears
centered around Mexico," said Truglia. "The Mexico problem was
solved very quickly. So you had a lender of last resort -- the
United States and the (International Monetary Fund). A large
amount of money was provided. Investors lost only (short term)
mark-to-market and very quickly things returned back to normal.
Therefore, funds flowed after a slight interruption," he said.
"This time around we've had an actual default," said
Truglia, referring to the debt restructuring announced last
month by Russia on domestic Treasury bills.
Investors are coming to the view that the likelihood of
default for other countries cannot be ruled out, the Moody's
official pointed out.
"The argument was made that once you have marketable
securities, there will be no default; we can't afford a default
and many investors believed that and there was a huge rescue
program put in place in the case of Russia," said Truglia.
"What happened? It defaulted. So lots of people have lost
lots of money. That has caused problems," he said, adding that
investors have begun to liquidate holdings in many parts of the
developing world, including Latin America.
Moody's believes better domestic policies in Mexico and
Argentina make them less dependent on external financing than
Brazil and Venezuela, Truglia said.
Asked about the lower rating on Brazil's domestic debt
compared to its foreign debt, Truglia said that because of the
short-maturity and high interest rate on domestic debt, the
risk of default on the domestic debt is higher.
"We are telling you that risk of default on a Eurobond or
Yankee bond is less than risk of default on a local domestic
security denominated in a local currency" in Brazil, said
Truglia. "Part of the source of Brazil's problem comes from the
fiscal side," he said. With a large fiscal deficit, "it is
harder and harder to roll over (short-term) debt," he said.
"We pointed that out in the case of Russia, and we were
right," he said.
About 50 percent of Brazil's domestic debt is in short-term
floating-rate debt, according to analysts.
Brazil's finance ministry on Friday called the Moody's
downgrade "a mistake, certainly the fruit of disinformation."
The ministry noted that Moody's pointed to Brazil's "twin
deficits." The ministry complained that Moody's did not take
into account the improvement in the nation's current account
results or the structural progress Brazil has made in its
fiscal policies.
A Moody's spokeswoman explained that the agency was worried
about long-term prospects for emerging markets.
"Our actions in Latin America take the long-term
perspective so we are not chastened by comments based on
short-term observations. It's sometimes easy for the markets to
forget what ratings are and are not," the spokeswoman said.
Moody's trimmed the country ceiling for foreign currency
debt of Brazil to B2 from B1 and lowered its domestic
government bond debt to Caa1 from B2. The agency also chopped
the rating on Venezuela's foreign currency debt to B2 from B1.
It is reviewing Mexico's current rating of Ba2 and Argentina's
rating of Ba3.
Copyright 1998, Reuters News Service |
