What does it mean for Wall Street to buy debt from Latin American countries?

The world changed because of COVID-19. Of course, not everyone was able to cope with the huge financial losses it entailed. In the case of our region, the Economic Commission of Latin America and the Caribbean (ECLAC) warned that this is the biggest economic crisis in a century for Latin Americans.

Although this unprecedented collapse occurs in all parts of the world, the Latin American economies had to face a really big crisis. Perhaps, for this reason, an alternative began to take hold to face the ability to pay in the face of such financial inconveniences: debt.

Governments borrowed through sovereign bonds, in such a way that they could reduce the enormous fiscal expenditure that the redistribution of income implied to lessen the impact of the pandemic. For this reason, some entities can take advantage of this financing to buy debt, as is the case of Wall Street. Let's know more details.

Wall Street and Latin American debt

Large investment funds are interested in Latin America, as it tends to offer the best interests compared to the rest of the world. This explains why private capital is directed towards our region during the crisis, being an investment that comes, at least mostly, from Wall Street.

The explanation of the need for debt is based, how could it be otherwise, in the various aid measures launched by our governments. From the BBC they warn that, contrary to what is believed, the region is not the one that spent the most in terms of GDP, since 2.4% was used, while the world decided to allocate a total of 3.7%, approximately.

The question, then, is not so much about the amount of spending compared to the rest of the world, but to understand that the interest rates of the richest economies are at the lowest levels in history. For example, according to El País, Banco de México cut this level to 4%, which implies the smallest amount since 2016.

For this reason, countries and companies prefer not to go into debt. The downside is that they would not only go into debt to cover the growing level of expenses due to COVID-19 but also to refinance previous debts. That is, take on debt to be able to face the interests of the debts of years ago.

To understand it better, we must know that, in 2020, the region issued government and corporate bonds worth $ 157 billion. This does not apply to the Argentine and Ecuadorian economies, which have low access to international debt markets, which makes it difficult to bring foreign capital to invest in their territories.

In the case of these countries, Wall Street decided to exclude them from the list of countries with access to credit to restructure their debt. The reasons were simple: they don't have clear sustainability policies. In the case of the Argentine economy, we see that the rating agency Moody's revealed that it was the one that fell the most among the G20 countries, with a 10% drop in GDP, compared to 3.3% in the rest of the countries. At the same time, he assured that it will be the country with the lowest growth during 2021, which makes Wall Street's confidence even more difficult.

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For this reason, it is really attractive for the bond market to finance the region by buying debt in emerging countries with payment capacity. The risk would be that interest rates outside the region end uprising, but also depreciation of exchange rates. Similarly, the capital flight could also be a problem, something that would happen if other markets become more interesting to invest in.

Should US inflation rise, interest rates would rise and Latin America would have a new capital flight. That, in turn, would create difficulties in obtaining financing from abroad, which continues with the cycle of fewer and fewer companies being willing to invest in the region and generate wealth from the private sector.

Indeed, Wall Street had invested about 115,000 million dollars in debt of Latin America, while that value in all emerging markets rose to about 614,400 million. However, the interest depends, as we mentioned, on the fact that there are no changes in monetary policy.

Thus, the ability to save can also be key to avoiding a possible capital flight and a decline in economic conditions in the region. Ultimately, at such a delicate time for Latin America and the world, where the confidence of the markets is needed to generate the necessary conditions for fiscal stimulus, it is key to understand why Wall Street took so much interest in this place.