“Hot Money” Flees Latin America, Triggers Currency Bloodbath, Risk of Mega Debt Crisis

Blood on the Bourse

By Don Quijones, Spain & Mexico, editor at WOLF STREET

The script of the current dramas besieging the global economy was written seven years ago. It was written when the world’s biggest central banks, with the Federal Reserve leading the way, decided to combat (or at least postpone) an endemic banking crisis by flooding the globe with countless trillions of dirt-cheap dollars, euros, yen, pounds, Swiss francs, and yuan.

With most developed economies stalled and their engines flooded, part of this “hot money” went elsewhere, and much of it poured into the fast-growing developing and emerging markets of Latin America, where it chased high-yield risks that would have been unthinkable, were it not for the newfound abundance of cheap money.

Coinciding with China’s seemingly insatiable thirst for commodities, this sudden glut of global liquidity helped transform Latin America into one of the world’s fastest growing regions. Western corporations, banks and investors also benefited along their way, as their high-yield emerging market investments more than compensated for the lackluster opportunities offered by the stagnating economies of Europe, North America and Japan. For many Spanish multinationals, the region is now the most important source of revenues and profits [read: Downturn in Latin America Mauls Spanish Companies, Threatens Spain’s “Recovery”].

However, seven years after the world’s central banks embarked on the biggest money printing spree in recorded history, the movement of funds has begun reversing — and at a vicious rate!

Blood on the Bourse

With the exception of sub-Saharan Africa – it accounts for half of the 10 worst-performing currencies this year, and its foreign exchange reserves are a 10th or less of the emerging market average –  no region is more vulnerable to this reversal than Latin America.

The region’s currencies have just registered their largest cumulative drop in 22 years, as El Financiero reports, a worse performance than during the Financial Crisis or even amidst the region-wide chaos triggered by the collapse of the banking sector of Latin America’s second largest economy, Mexico, during the 1994 Tequila Crisis.

On Monday, Mexico’s currency registered a new historic low as it crashed through the psychological barrier of 17 pesos to the dollar, and today hovers at 17.15. Since August last year the peso has lost nearly one quarter of its value against the dollar.

“It’s a bloodbath, We are seeing panic sales due to global growth fears and the uncertainty around the Fed’s next movement,” said Bernard Berg, a strategist for Societe Generale SA.

As for Latin America’s largest economy, Brazil, which represents 56% of the entire region’s GDP, it is heading towards its longest recession since the 1930s, while its government, like Mexico’s, is mired in a huge, deeply destabilizing corruption scandal.

In the last year alone, the Real has lost a staggering 35% against the dollar, while the Sao Paolo-based Bovespa Index plunged 21% over the same period and is down 15% over the past 30 days alone, despite today’s relief rally!  The iShares MSCI Brazil Capped Index Fund sunk to its lowest level of the past decade.

Meanwhile, Latin America’s biggest oil exporter, Venezuela, is home to the highest level of inflation in the world, growing bread lines, empty supermarket shelves, and a collapsing economy. Investors assume with near-certainty that it will default on its dollar-denominated debt.

Even Colombia – supposedly one of the region’s rising stars – is struggling. Its currency, the peso, has suffered the largest drop of the world’s 31 most traded currencies, having lost 36% against the dollar in the last 12 months. The governor of the country’s central bank, José Darío Uribe, said in a recent interview that the country had suffered a serious financial shock from the collapsing price of oil, which represents half of the nation’s exports.

Beyond Control

There are many causes of Latin America’s current woes, but the two most important ones – the abrupt end of the commodities super-cycle and the strengthening U.S. dollar – are completely beyond the control of the region’s governments or central banks. Unlike the Fed, the central banks of Latin America can’t print dollars. Instead, they have to dip into their limited foreign exchange reserves.

This is precisely what the Bank of Mexico did on Monday, when it stepped up its market interventions by increasing its daily auctions of US dollars from just over $50 million to $200 million, but to no avail. Given the size of the heavily rigged global foreign exchange markets, on which over $5 trillion worth of currencies are traded each day, a couple of hundred million dollars do not even qualify as a rounding error. It is certainly not enough to stem the tide of global investor sentiment.

As I warned in “Corporate Dollar Debt Explodes in Mexico as Peso Dives,” the current economic troubles in Mexico, as in much of Latin America, in particular Brazil, are not just being fueled by investor sentiment. They are also the direct result of a sharp increase of dollar-denominated corporate debt:

Corporations can borrow more cheaply in dollars. But as the domestic currency falls against the dollar, the dollar-denominated debt held by Mexican corporations with peso-denominated operating income becomes increasingly difficult to service. It’s a recipe for a debt crisis.

Worse still, if the Fed were to do the previously unimaginable and begin raising interest rates this year (a big “IF”), it would drain what little remains of investor appetite for risky emerging market assets. Just as happened in the Tequila Crisis, footloose “hot money” would flee Latin American economies in pursuit of rising U.S interest rates, leaving a trail of devastation in its wake.

And that’s when the real pain will begin. Unlike the rich economies of North America and Europe, Latin American countries have neither the resources nor the social safety net to minimize the economic carnage or mitigate the humanitarian crisis that will inevitably result from the next phase of the Global Financial Crisis. By Don Quijones, Raging Bull-Shit.

So where do we go from here? An Emerging-Market debt crisis, an epic US dollar short squeeze, and many big losers. Read… Fear the Strength of the US Dollar

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  14 comments for ““Hot Money” Flees Latin America, Triggers Currency Bloodbath, Risk of Mega Debt Crisis

  1. hoop says:

    They will de-dollarize. Here in Uruguay the central bank president have already said this. By the way he said the FED will start raising this year.

    The government has already proposed a spending plan equal to 21 pct from the present GDP in 3 years. This is on top of what they already spend and planned to spend because of social income transfers (Uruguay is aging like Argentina). It means it will probably run a deficit between 7 to 10 pct a year. in the coming 3 years, all in UYU. So more UYU means a falling UYU against the USD, EUR, etc.

    For your info, Uruguay produces 28 times the quantity of food they consume. So There will be enough food. Houses can be built with materials from Uruguay. Electricity comes from the the dams. They have also plenty trees they can cut for heating/cooking purpose etc.

    Of course they will consume less products made outside Uruguay for which they need foreign currency. Like petroleum products (luckily they are way down now), so people will use more the very reliable public transport in combination with the taxi system. And maybe they will go instead of 2 times on holiday they will go 1 time.

    The government here like those in Argentina, Chile, Brazil and many other Latin countries are from the left side, so they will simply redistribute the UYU income from the rich to the poor via taxes and INFLATION :)

    Dollar debts can be a problem for companies and governments etc. But they can default like Argentina did :) So i think the social catastrophe you predict is a bit ……

    • Wolf Richter says:

      But wait, hoop … when they default, they can’t borrow anymore. These government budgets run deficits, and have gotten addicted to borrowed money. Once that gets cut off, a lot of bad things happen. See Venezuela. It has to go begging to China and Russia, and terms are harsh! And it hasn’t defaulted yet!

      And when corporations default, they lay off workers and shut production facilities, and layoffs cascade through the economy. If enough of that happens, the local economy can spiral down into a depression in no time.

      Defaults are devastating. Remember the upheaval in Argentina when it defaulted 15 years ago?

      • hoop says:

        Yes they cannot borrow anymore. So what 

        First of all, is that borrowing not the present problem in many countries ? So borrowing leads to problems finally and being cut of borrowing also leads finally to problems. I know that you full agree with me since you are a let say Austrian school blog.

        Second they can borrow UYU. This means the Sate start to run deficits. (See their 21 pct of GDP idea) They borrow from the treasury and they spend it in the economy. The people who receive this money (the workers of Uruguay) need investments so they can buy this treasuries. This is exactly the same England did and of course Uncle Sam and the champion is this is Japan. Uruguay just like any other country in Latin America are in control of their own money. They are not Greece.

        This means that they maybe cannot get Dollars or EU or Yuan’s. And will be forced to reduce buying gadgets like Ipods, or overprice transport devices like Mercedes or worse Military equipment from Europe, Japan America or China.

        As said in my previous comment Uruguay have enough resources to sustain itself. For example I not need to heat my house in the winter or cool it in the summer. Today its outside 12 degrees, so I sit inside the house with a woollen clothes. And I am fine. We have lots of sheep’s here. Little bit later I will barbecue a nice steak and will eat it with fresh salad and tomatoes. For dressing I use balsamico. All comes from Uruguay. Yes I can go around the corner and by a big mac or a whopper. We have all these s… here too.

        For a normal life, Uruguay have everything. Something’s not, for example gas and petroleum products.

        Gas comes from Argentina. In summer 1 million or more Argentina’s come here and spend their ARS here. These ARS are used to buy gas from Argentina.

        Also a lot of Brazilians come here they spend their BRL here and we buy with these BRL now, for example, very cheap pork meat which the Brazilians cannot export to Russia anymore. Because of the Ruble collapse.
        (NB: The Russian agricultural sector is booming since they are forced to buy local. And read this http://grist.org/news/abandoned-russian-farmland-soaks-up-50-million-tons-of-carbon-every-year/ )
        So the best part of the pork goes here for let say USD 5,00 a KG. If the BRL falls further in value the prices will even become cheaper. (NB: Cow meat is a bit expensive here at this moment because the Saudi’s are buying a lot, but I assume that that now is over too  )

        Anyway normal life here will continue but the rich upper class will go a bit less on holiday to Europe and the USA etc. And the median and lower class will buy less gadgets and brand clothes from Europe, japan etc. I not consider this a bad thing. And certainly not catastrophic  ) Now people have a computer, laptop, Ipad, Iphone, tv and radio. Soon they have only depending the person and an Ipad or Iphone or Computer or Laptop etc. So we will have less of these products. I am the proof this is possible because I have only a desk top computer with access to internet.

        Uruguay will continue to have foreign income. Export will continue maybe only with reduced income. But maybe not enough to pay all outstanding debt. In that case they must simply default. I don’t know how indebt Uruguay is, public and companies, in foreign money. But does the lender not bear responsibility too.

        Yes maybe companies will close, like last week Fripur (fish processing plant) and they laid off 960 people. Or 3 years ago the Pluna (national airlines) who laid off also a few hundred people or the car processing plant of Cherry Q (Chinese brand). So yes this all is already happening. But the employees of Pluna are now busy setting up a cooperative company to bring them back into the skies . I expect that Fripur after the bankruptcy can start with a clean shirt again. This is Capitalism.

        Look people cry about Argentina. (Bianca Fernet  )But its running for now more than 13 years since the default. Yes you have poor jobless people but you have them to in the USA, I believe 93 million are not in the labour force same counts for Europe. This is a problem everywhere. I was a hardcore capitalist but ustand now that we life in a central planned world since let say the great depression. The amyority of the people in the world like this system, so I gamble things will stay this way. That means a heavy (visible) governmental)) hand in the economy. So yes Uruguay goes Argentina or even worse Venezuela. Probably Brazil too and Columbia and many more. Redistribution of wealth by agreement or hard hand.

        Anyway low commodity prices are helping the Uruguayans to pay their debts.

        The world is rebalancing and I thing thinks become more local. I think that is good. I am not worried.

    • Yancey Ward says:

      I just laugh my ass off at these sorts of beliefs. The Venezuelans were no doubt thinking the exact same thing as Hoop does.

      • hoop says:

        You are allowed to laugh. :)

        But now the reality.

        NB: To let you laugh a bit more. Uruguay buys by the way oil from Venezuela. In return Uruguay sell them chicken wheat and milk products.

        Now the trade is settled in dollars but in the future maybe in ??????

        Not only NORTH America does trade, their Latin brothers do this to.

        They use the dollars because America used to be a great nation in producing products everybody wanted to have. But you got competitors.

        The previous decades caused that there are a lot of dollars in circulation and the USD has become defacto, the world reserve currency. For your patients, this will remain so for the time this is appropriate so.
        To be the reserve currency has to do with the quantity of trade you do and the size of your country and the ability of your military to force other to use your currency via direct or indirect means. (off course this last is not really free capitalistic but let’s forget about that, the USA is still a big trader in the world.)
        So as a result many dollars are floating around. (NB: Mac Donald’s in 2009 borrow from the FED direct because the shadow banking system failed. In fact Mac Donald’s should maybe have gone bankrupt as a result of this. Harley Davison too and many more. But the government and fed stepped in and saved the day. What they did not tell you that this is unfair towards for example here the local hamburger seller, who competes with Mac Donald’s. who needs to borrow at 20 pct. Mac Donalds have for years benefitted from artificial low interest rates (borrow short, invest long) and when they got the bill presented they run crying to Uncle Sam) In fact, in my eyes, the USA has helped its companies and according many free trade agreements (WTO) the Americans don’t allow other to do so. Double standards. But as said we not speak about military force here.

        Now the basic of my story. If price of commodities stay low Uruguay will earn less foreign currency income. Is it wise to start to borrow than in this foreign currency ? You know like maxing out your credit card ???? Or is I better to start borrowing in UYU. Ergo a kind of QE policy (because of course the Uruguayan government will pay less interest than the inflation which will be cause by their 21 pct GDP plan. This will be exactly the same like their brothers in NORTH America did, only they can play the game still with positive interest rates.)

        You can laugh about this off course. But I assume than that you prefer dying people here because the government don’t want to borrow, or cannot borrow in USD while they can borrow UYU and use only products and services priced in UYU.

        Have a nice evening, I am going to prepare my steak. Red and juicy, slaughtered today by a not certified local unemployed butcher.

        NB: This is the same way the Argentina Government is running the show and now also Brazil and off course Venezuela and Japan, Europe, Putins Russia and soon Australia, Saudia Arabia and many more.

        NB: The locals in all the above country will be forced to alter their behaviour from stupid consumer of western controlled brand products of low Chinese produce quality, to producer themself.

        What is the problem with that. Yes it can take time and things can go wrong, like maybe the brewing war between Venezuela and Columbia.

        • Gaijin says:

          You are right – if something bad does happen you have your steak and you have everything you need right inside your country. You don’t have to worry about anything. I am a capitalist myself but you are correct. Enjoy your steak!

  2. Richard Lamb says:

    It was thought/hoped that Central Bank intervention could nullify the pain resulting from the financial crash. Their interventions, however, have merely postponed the fallout with ZIRP & QE leading to an enormous mis-allocation of resources and a huge increase in debt. So when it finally all goes belly-up the fallout will be far worse than had the original boom and bust been allowed to play out.

    Central Bankers, as with Medieval alchemists who claimed to be able to turn base metal into gold, do not have a cure for a bust. Their panaceas will result in the bust being bigger bust.

  3. rich black says:

    “Worse still, if the Fed were to do the previously unimaginable and begin raising interest rates this year (a big “IF”), it would drain what little remains of investor appetite for risky emerging market assetsa’

    If the Fed raises interest rates, it won’t be more than a quarter of a percent. And even then, if markets tank, the Fed will just lower the rate back down to zero. Nothing will change the Fed’s ZIRP. The US Treasury is in no position to pay interest on its debt.

  4. Julian the Apostate says:

    Hoop makes some good points. But I would remind him that the ‘hard hand’ if government might come looking for him after they’ve destroyed what’s left of America and snagged all the low hanging fruit. Smoke ’em if u got ’em after that steak, Hoop,

    • hoop says:


      I think before they come after me, they will already be hanging on the highest three my neighbours can find, because they are the same like me middle class people which is now same like lower class. We are all in debt and/or have not a lot of money to spend.

      Does the possibility to spend usd 500 or usd 1000 more a month make a real difference. (Here the difference between middle class and lower class) So between 6000 and 12.000 more a year. What you buy now a days for usd 6000 or usd 12000.

      I cannot go on holiday to US or EU or Japon etc for that difference because i probably life in a house which cost a lot more than the lower class life’s. This is because the people who own the properties (the warren buffets and carl ichans of this world) know that you have a regularly income and can lever up x3 or x5 or x10 via a mortgage (This depend how crazy the central bank is) Let say a lower class house here in uru is between 10.000 usd and usd 50.000. After that it goes immy to 150.000 to 400.000 for middle class. I not even speak about apartments because than the situation becomes completely crazy if you recalculate this to m2.
      We life in an ever increasing world of assets prices which is the collateral behind all the loans. Let say in America now the wages rise 2 pct and you have zero pct down mortgage loans the rice of the house can rise 4 pct.
      So the France economic Thomas Pitkey I right Capital growth faster than GDP. I not support him, he looks to only one thing asset appreciation. Asset appreciation can go in reverse. Off course this all goes good for areas where there is a goods producing industry / services industry and consequently where people want to life and as long as population decline not intervener with the calculations. So you can now buy a house in Detroit for let say 5000 (because there is no economical support for higher prices) but in new york the same house costs 500.000. But on the end of the day the people still eat out of a can. The same goes for a worldwide view.

      The de-dollarization will mean that we earn less dollars here, so salaries go down in USD and consequently GDP goes down in USD, and that means that price depending the mortgages leverage factor and debt to income leverage factor of companies etc. have to go down to in USD. So I want to introduce a new term in the financial world : The rest of the world have to some Detroit-ization. (The central bank president called it here De-Dollarize) Some call it impoverishment. But I think warren buffet was correct when he said when the water goes out you find out who swims naked.

  5. Fred Hayek says:

    Some of these nations have tremendous mineral wealth. Maybe if all their central bankers hadn’t gone through the requisite fantasy economics brainwashing at Ivy League schools in the U.S. they’d consider backing their currencies with gold or silver or with enacting the silver coin plan of Price.

  6. Petunia says:

    Everybody seems to be overlooking the obvious. The more depressed the currencies become in South America, the more investment they attract. Our own presidential candidate, Jeb and his family, own 200K acres of land in Paraguay. It is common to see Americans leaving for other countries. Mexico is popular in this respect.

    Hoop, I have been to Uruguay and remember it fondly. The people were welcoming, the steak is the best I have ever had, the leather goods put European designers to shame, and the workmanship was excellent. My dream is to have a home as beautiful as the ones I saw in Punta del Este.

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