Latam Capital Crunch May Outlast Tequila Effect: Moody's
Dow Jones Newswires
NEW YORK -- Moody's Investors Service said Tuesday that the
ongoing reduction in capital flows to emerging markets is likely to place
"particular stress on heavily indebted Latin American nations", with
consequences possibly more long lasting than those following the Mexican
peso crisis mid-1990s.
In a press statement, Moody's said the region's difficulties are "not likely to
resemble the relatively short hiatus in market access in 1995 during the
Mexican Tequila Crisis because this time around, the world economic
environment is considerably less benign."
Moody's said Latin American countries will find it increasingly difficult to
refinance the large volume of debt maturing over the next several years due
to continuing tight credit, a poor outlook for export earnings and low
prospects for significant help from international agencies such as the
International Monetary Fund.
Moody's said it "points particularly" to the foreign currency ceilings of
Mexico and Argentina, both under review for a downgrade, as well as that
of Brazil, which the rating agency lowered on Sept.3.
Moody's said that in the period 1990-1997, the three countries played the
dominant role in the region's placement of $200 billion in bonds, 45% of
all such debt issued by emerging markets worldwide. Moody's said
countries in the region currently have approximately $687 billion in total
debt outstanding.
Foreign capital inflows have financed a rapidly widening current account
deficit throughout the region in recent years, Moody's said, with Argentina,
Brazil and Mexico accounting for approximately 80% of the total.
Moody's said credit spreads between emerging market debt and
comparable U.S. Treasury rates have nearly tripled over the last two
months, to over 1,500 basis points from around 600 basis points. The
rating agency said it expects those elevated spreads to "remain wide over
the next year, at least" in Latin America and most other emerging markets.
Moody's said the Tequila effect was relatively short-lived largely because
of the financial assistance provided by the U.S. and the IMF as well as
swift and effective policy responses by Latin American governments.
The current situation, Moody's warned, is more difficult because of
Russia's recent default on certain obligations, the "confusion caused by the
imposition of complicated exchange controls by Malaysia, as well as
negative sentiments regarding the health of the U.S. and European
economies." The agency said the ability of the IMF and other official
creditors to act as lenders of last resort is limited because of the sizable
commitments they have already made to Asia and Russia.
"Moreover, the retrenchment of the international bond and credit markets
is likely to exacerbate any remaining structural weakness resulting from
delayed or incomplete reform efforts, leaving certain Latin American
countries in a very unpleasant situation," Moody's said. It added that "even
well-disciplined countries that already have been tightening policies as part
of their restructuring effort will undoubtedly be forced to tighten even
further to adjust to the reduced emerging markets credit access."
Moody's said governments will find it difficult to compensate for the drop
in capital inflows with decisive policy responses alone, "so it is inevitable
that the difficulty of meeting external payments obligations has grown."
"The likelihood that countries in the Latin American region will resort to
capital controls, debt rescheduling, debt moratoria, or any combination of
those actions before their reserves are fully depleted by repayment of both
short- and long-term debt as well as speculative capital outflow has
increased significantly," Moody's concluded. |
