RIO DE JANEIRO, BRAZIL – Sovereign bond defaults have grown at a dizzying pace in Latin America since the beginning of the pandemic. First it was Ecuador, then Argentina, Suriname, Belize, then Suriname again, and Suriname once more.
In total, more than US$80 billion in foreign bonds have been restructured. And more problems lie ahead.
Traders are almost certain three of those countries will default yet again, bond prices suggest, and the fourth, Ecuador, is far from financial stability. Then there’s the case of Venezuela, which has been mired in default for so many years that creditors have resigned themselves to recouping just a tiny fraction of their money, if anything.
All of which makes the current moment feel a bit like a flashback to the Lost Decade of the 1980s, when Latin America’s heavily indebted countries sank into default one after another and their economies fell into protracted recessions that deepened poverty. While this time is unlikely to be as bad – in part because rising commodity prices are providing a financial lift – no bond market in the developing world has been upended in the pandemic quite like Latin America’s.
Plagued by endless waves of Covid-19 and economic paralysis, the region has become an example in the study of how the coronavirus has deepened the divide between rich and poor countries.
The region’s plight is adding a sense of urgency to the calls in policy circles in Brussels and Washington to provide more relief to developing nations after the Group of 20 leading countries put a temporary moratorium on certain debts. In June, the board of the International Monetary Fund will consider a proposal to free up an additional US$650 billion to lend to struggling countries.
Siobhan Morden, a Wall Street analyst specializing in emerging market debt over the past three decades, says that the economic fundamentals in Latin America are so weak that “even the strongest countries are struggling.”
“It is a difficult dynamic,” says Morden, who runs Latin America fixed-income strategy at Amherst Pierpoint. On the one hand, bond investors are demanding fiscal restraint to ensure long-term debt sustainability while on the other, governments are eager to ramp up spending on much-needed social and medical programs. “The two are incompatible.”
“Rating agencies and bond vigilantes are quite nervous about repayment risk,” Morden says, “and that has a lasting impact.”
The reasons for that angst are plain to see. Some of the biggest names in international finance – BlackRock, Fidelity, Ashmore, Greylock – got burned by the defaults in Argentina and Ecuador. Moreover, returns more broadly on assets in the region have been dismal.
Dollar bonds issued by Latin American governments are the worst performers of any emerging-market region tracked by JPMorgan Chase over almost any recent time period, including a 3.1% loss this year. The region’s stocks, tracked by MSCI, follow a similar trend going back as far as a decade. And several of its currencies are among the biggest decliners in the developing world this year.
A recent HSBC survey of money managers illustrated how gloomy the mood is. Of the 164 surveyed, just 43% said they had overweight positions in Latin America, down from 70% in January.
Countries that defaulted have long had weak finances, and few analysts see the region’s top economies – Brazil, Mexico, Chile, Colombia, Peru – sinking into financial crisis any time soon. They have solid hard-currency reserves, access to debt markets that global central bankers flooded with cash, and they’re benefiting from soaring global demand for their commodity exports.
But even in these countries, the signs of stress are increasing.
Chilean assets tumbled recently after workers won permission to tap pensions for the third time since the pandemic began. Peruvian bonds have rebounded somewhat, but are still among the worst in emerging markets this year as a Marxist candidate leads presidential opinion polls. In Colombia, the government’s attempts to increase taxes were met with deadly street protests, forcing policy makers to retreat.
In Brazil and Mexico, the region’s two powerhouses, the cost for the government to borrow in dollars has jumped relative to peer countries in other parts of the world.