When Mexican finance minister Pedro Aspe met Nicholas Brady in
1988 to discuss Mexico's problems during the Latin America debt
crisis, what he sought was a smaller debt burden for his
While Brady sympathized, the former US Treasury Secretary
said his government's role was simply to help facilitate the
process: it wasn't a bank; and since Mexico had borrowed money
from private lenders, it needed to strike a deal to roll over
its debt through more financing.
"There are a lot of lessons we learned, some of them the
hard way by not being careful with our debt," says Aspe, now
co-chairman of Evercore Partners, an independent investment
Aspe's single most important lesson from the 1980s Latin
America debt crisis was simple: no debt plan can be a
substitute for sound economic policy.
In the years following Mexico's $48 billion Brady debt
rescheduling, the country's fiscal discipline and reform
momentum has given the country greater credibility. Today, it
holds a coveted status as one of the most sophisticated
borrowers in Latin America.
"Every country would like to be Mexico," says James Craige,
head of emerging markets debt at Stone Harbor Investment
Partners. "Mexico has a fully developed yield curve in dollars
and pesos and only issues in dollars to keep that curve intact.
They have a strong and functional local market and are a poster
boy for all EM countries."
While many Latin American countries have cut their
debt-to-GDP ratios, implemented structural reforms, introduced
independent central banks and liberalized labor laws, others
have not. The result is a widening gap between the
creditworthiness of countries in the region.
"There will be continued differentiation in the market
between the winners and losers," says Paul DeNoon, director of
emerging market debt at Alliance Bernstein.
Alliance, which takes a bottom-up approach on picking
securities, is optimistic over Mexico's outlook, spurred by
energy reforms planned for the second half of 2013. DeNoon
describes Mexico as a country that has set the stage for
more sustainable growth.
Since Latin sovereigns rescheduled their way out of
overbearing debt loads in the late 1980s and early 1990s under
the Brady plan, their ability overall to raise cash in the bond
market has improved.
This magazine cheered an impressive year for sovereigns in
the international markets in 1991, celebrating particularly a
$300 million Eurobond sold by Argentina. Lauded by LatinFinance
as Deal of the Year in 1992, Argentina's offering was
particularly spectacular for coming before the country signed a
Brady Bond agreement. Earlier that year Mexico had raised a
$202 million five-year bond.
By 1993, a busy month meant Latin borrowers were selling
close to $3 billion of Eurobonds. That dropped sharply 1994,
though, when soaring US interest rates sent shockwaves through
All the same, those deal sizes look tame today. Now the
best-rated sovereigns can easily raise $1 billion in a day. The
progress is due to a number of factors. Local markets have
developed and currencies, especially the Mexican peso and
Brazilian real, have become increasingly liquid.
But the progress is as much about political decisions as it
is about market depth. "It is not a story of debt and debt
management but a broader story of macroeconomic policy," says
Gerardo Rodríguez former undersecretary of finance and
public credit in Mexico and now managing director at investment
firm BlackRock. "Mexico has been a front runner in innovation
and experimenting with the non-obvious in Latin American and EM
Since Chile took the first Latin investment grade rating in
1992, the region has evolved from a predominantly
sub-investment grade market to one where around three-quarters
are rated triple-B or higher. Freer markets and stronger rule
of law were also critical in paving the way for capital markets
for both debt and equity to develop, says Roberto D'Avola, head
of LatAm DCM at JPMorgan.
That is not to say that only the strongest countries can tap
debt markets: single-B rated Honduras sold its debut dollar
bond in March, a couple of months after double-B Paraguay
pulled a similar trick. Nevertheless, volatile economic
policies and debt management strategies in countries such as
Argentina, Ecuador, Bolivia, Belize, and Venezuela generate
worries among some international investors looking at Latin
Ecuador, for example, was stymied by a history of default -
in 1999, it called for renegotiations on its Brady Bond debt
only to default again in 2008 - when in mid-2013 it considered
a bond market return. And Argentina has spent more than a
decade wrangling with global investors after stopping payment
on $144 billion of debt in 2001.
"This can lead to the perception the entire region is a
political mess," Craige says. "The reality is these countries
are outliers. Argentina will continue to blame others for their
problems 20 years from now, but for every Argentina we have
Peru, Panama, Colombia and a host of others that took the
responsibility upon themselves to address their debt overhang,
high inflation and sub-par growth to become investment grade.
They will continue to prosper as a result."
Penelope Foley, co-manager of the TCW EM Fund which has $130
billion of assets under management says: "The big change from
the last 10 years, and for the next 10, is the recognition that
emerging markets as a class will not lock-step together as a
As the emerging market investor base deepens, portfolio
managers are taking a closer look at the differentiating
factors between Latin America's sovereign borrowers. The
region's two largest economies, Mexico and Brazil, are examples
of countries heading in different directions.
"Mexico began a very strong reform momentum," says Marcela
Meirelles at TCW. "Brazil unfortunately is going through ad hoc
measures focused on boosting consumption and has more
underlying obstacles for higher growth rates. These are two
different extremes on how proactive the governments have
Commodity exports to China have supported a number of
economies over the past decade. Those countries - such as
Brazil - are likely to feel the effects of lower demand as
China's growth moderates.
"Some countries have been lucky. And other countries have
been working hard to improve fundamentals," says Michael
Chamberlin, executive director of the Emerging Markets Trade
Association, and a former partner at law firm Shearman &
Sterling, where he worked on Mexico's Brady bond debt
But those that did the best were also those that worked hard
at reforming their economies and legal infrastructure.
"It is important to look at what Latin American countries
have done to improve fundamentals," says Uruguay's debt
management head Azucena Arbeleche.
"We have been favored by a lot of liquidity, but some
countries have done reforms and have improved their
fundamentals," she says.
"LatAm countries can offer good quality paper. At the same
time LatAm investors increasingly demand assets in which to
allocate their pensions fund savings. We have already seen an
increase in cross-border investment from pension funds and
insurance companies in LatAm."
Sovereign funding has moved from bank loans to bonds over
the last quarter century. With that, new frameworks for crisis
resolution are emerging, Arbeleche says. She highlights
renewed focus on the role collective action clauses (CACs)
could play in resolving sovereign debt problems.
The most important of these is the majority-restructuring
clause, by which a qualified majority of bondholders can vote
to alter the payment terms of the bond and make these changes
binding even for dissenting bondholders.
Aspe says reform is a process that takes decades and is
ultimately influenced by the politics and culture of the
country in question. His advice to Latin America's emerging
markets: patience and consistency. "There will be fruit, but
the harvest will not come tomorrow. Sometimes it comes five to
10 years [after planting the seeds]." LF