Signs that the US Fed will seeks to begin tapering off
stimulus have led to selloffs for EM assets, and concerns that the days of cheap
borrowing may be over. If the end of cheap debt is combined with commodity
prices coming off historical highs, some LatAm governments could be caught in
the pinch. The restructuring spotlight has firmly been on Europe in recent
years, though it threatens to shift back to EM, including LatAm.
“The strains on EM will begin to appear in the next two
years,” said Lee Buchheit, partner at Cleary Gottlieb Steen & Hamilton, and
veteran of multiple sovereign restructurings. “They have been plastered over by
these benign macroeconomic phenomena. The dearth of restructuring over the last
five years in emerging markets generally has been a happy product of
historically low interest rates and historically high commodity prices. When
you get those two things moving in the right direction it provides relief for
countries that otherwise might have been the object of concern.”
The lawyer cautions that it is still too early to start
making predictions as to who will struggle, particularly among the region's
larger economies. However, the Caribbean nations have not benefitted as much
from the pair of favorable trends.
“The debt situation for many of these countries remains very
fragile,” Buchheit said, pointing to the recent developments in Belize, Grenada
Jamaica followed up the $7.7 billion JDX exchange in 2010
with the $9.1 billion NDX this year, and still faces challenging funding needs.
Grenada has missed coupon payments and is seeking an agreement with creditors.
Belize completed a debt exchange in March.
Could some of the larger LatAm countries be in trouble? It
is possible, the veteran lawyer said.
“If you have a significant drop in commodity prices and a
significant rise in interest rates, it would begin to show some of the strains
on those economies,” Buchheit said. “Generally, there is no doubt that EM
countries have inoculated themselves from some of these difficulties, having
gone through the horror of the 1980s and for some of them further
restructurings in this century.”
With several countries receiving strings of upgrades in
recent years, it would appear that many are confronting the more challenging
times from a strong position. Brazil, however, was assigned a negative outlook by
S&P earlier this month, as a combination of weak growth and fiscal
deterioration threaten its government’s position.
The US Federal Reserve said Wednesday it may phase out monetary
stimulus, sending US and LatAm equity indexes falling Wednesday and again Thursday.
The Fed’s tone had many preparing for a shift in rates and volatility ahead.
“Chairman Bernanke appears to have validated expectations
that the era of ultra-low interest rates is about to end. An implicit floor in
US rates will put pressure on and add volatility to long-term rates in LatAm,”
Bank of America Merrill Lynch said in a report. The shop expects currencies and
interest rates in Latin America to trade with a bearish bias – weaker
currencies, higher and steeper curves – and high volatility in the near term.LF