Heavy Latin America debts complicate crisis recovery
Reuters, Thursday, September 17, 1998 at 20:20
By Axel Bugge
BUENOS AIRES, Sept 17 (Reuters) - Rocketing interest rates
that are raising debt costs daily are imperilling Latin
America's ability to pay its massive debt and its hopes for a
quick end to the current financial storm, market analysts said
on Thursday.
Investors are worried that the longer the crisis lasts, the
more expensive it becomes to service the debt and issue new
debt to refinance old liabilities, raising the likelihood of
payments failures, said analysts.
Russia's debt default in August has spooked investors into
thinking there could be similar problems in Latin America.
Sharply higher rates demanded by investors for holding what
they consider to be riskier Latin American bonds has pushed
governments' interest payments much higher and made it
extremely difficult to issue new foreign bonds. Short-term
rates have climbed to as much as 50 percent in some countries.
Interest payments in many countries represent the largest
single expenditure for governments. The region's three largest
economies, Brazil, Mexico and Brazil, all run budget surpluses
when excluding debt payments but deficits overall.
Moody's Investors Service sounded the alarm this week,
warning that "the prospect for a continued closing of the
international capital markets to emerging nations is likely to
place particular stress on heavily indebted Latin American
nations."
The credit rating agency cited Mexico, Brazil and Argentina
and said that between 1990 and 1997 Latin American countries
issued about $200 billion in bonds, or 45 percent of all
emerging market issuance for that period. Latin America has
about $687 billion of debt outstanding.
"The longer it (the crisis) lasts, the greater the risk of
moratoria or defaults, which would preclude market access for
years," Moody's said.
While many analysts in the region disagree with Moody's
view, they generally agree that the accumulation of bad news in
emerging markets poses risks for Latin America.
"The things here that make it quite difficult are Russia's
default, the Malaysian capital controls, Hong Kong's stock
interventions and so on," said Vladimir Werning, an economist
at JP Morgan in Buenos Aires.
"These are all very unorthodox solutions to domestic
problems which international investors will see as worsening
the risks in emerging markets."
Brazil is the top concern, especially because of its huge
domestic debt of $326 billion reais ($276 billion), most of it
in short-term bonds. Short-term debt is more worrying to
investors because it raises pressure on governments to find
funds immediately to pay it off or roll it over into new debt.
Ricardo Daud, head of research at Argentina's Bansud bank,
suggested one option could be a "patriotic bond" like the one
Argentina issued in 1995 to resolve liquidity problems
following Mexico's disastrous December 1994 devaluation. Local
banks agreed to take on the debt, figuring if the country did
not make it through the crisis neither would they.
Interest rates of 50 percent in Brazil to support the real
currency has made this debt much more expensive to service,
pushing the budget deficit to above 7 percent of gross domestic
product, compared with one percent in Argentina.
"A unilateral restructuring of domestic debt stock and some
form of capital controls could not be ruled out under a worst
case scenario in Brazil, and the specter of default risk would
loom over Latin American assets," said Dresdner Kleinwort
Benson in a research note.
"We do not believe that default is in the cards, only that
under a worst case scenario the risk would increase, as would
bond spreads," it said.
Copyright 1998, Reuters News Service |
