It’s not just countries that are at risk of contagion.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
Economic history appears to be rhyming once again in Latin America. Perennial credit-basket-case Argentina was one of the first countries to suffer a major currency crisis this century. Now, its government has asked the IMF for a brand-new bailout. But if this classic last-gasp fix was meant to calm the markets, it isn’t working.
Previous Latin American debt crises have taught us two things:
- The direct impact on the general populace, already suffering from sky-high poverty rates, is devastating;
- Once the first domino falls, contagion can spread like wildfire.
The debt crisis of the early 1980s, which spread to virtually all corners of the region, famously paved the way to Latin America’s “lost decade.” Mexico’s Tequila Crisis of 1994-5 at one point became so serious that it almost brought down some of Wall Street’s biggest banks.
At the moment, as long as the US dollar and US yields continue to rise, emerging market jitters can be expected to grow. As British financial correspondent Neal Kimberley notes, markets often behave like predators, running down what they perceive as the weakest prey first — a role being filled, with usual aplomb, by Argentina.
Emerging market weakness is by now a generalized trend. The jitters could soon spread to Latin America’s two largest economies, Brazil and Mexico, which between them account for close to 60% of Latin America’s GDP. Both of the countries face general elections in the next two months. In Brazil the most popular presidential candidate, former president Luiz Inácio Lula da Silva, is running his campaign from behind bars, where he serves a prison sentence after having been convicted of corruption. In Mexico, the front runner, Andres Manuel Lopez Obrador, has the country’s business elite so spooked that it has launched a “Project Fear” against his candidacy.
But it’s not just countries that are at risk of contagion; so, too, are global companies with a big stake in the affected markets. Few companies are more exposed to Latin America than large Spanish ones. Some were already burnt in Argentina’s last crisis and default. But in the aftermath of Spain’s real estate collapse, opportunities at home dried up to such an extent that access to Latin America’s fast-growing economies became a godsend. But it could soon become a curse.
Among the Spanish firms with most to lose are Telefónica, with €3.5 billion of revenues at stake in Argentina. It also generates €12 billion of its revenues in Brazil. There’s supermarket chain Dia with €1.74 billion of its in revenues in Argentina. Or Gas Natural with €574 million of its revenues in Argentina. Spanish infrastructure group Abertis, which was just acquired in a joint takeover by Italian rival Atlantia and Spanish construction firm ACS, has €400 million of revenues in Argentina.
Spain’s two biggest banks, Santander and BBVA, also have sizable stakes in the country, with Santander earning 4% of its group profits there and BBVA, 6%.
While Latin American markets have provided welcome diversification effects for the two big banks, they could also have significant implications for inward and outward spillovers. The subsidiaries of Santander and BBVA are “systemically important” for a number of key banking systems in Latin America, accounting for about 38% and 25% of Mexico and Chile’s banking sector assets, respectively.
In the case of BBVA, its Mexico operations account for almost half of the group’s global profits. For Santander its biggest source of lucre is Brazil, providing 27% of the group’s global profits in 2017. As the IMF cautioned last year, this “high reliance on foreign subsidiaries in profit generation could imply significant vulnerabilities if the economic and financial conditions in host countries were to deteriorate.”
At the beginning of this year, both Mexico and Brazil faced an uphill struggle, with inflation high, growth stagnating, political uncertainty on the rise, and in Mexico, serious doubts about NAFTA. Argentina has meanwhile sunk into full crisis mode. Now, there’s the added risk of a generalized deterioration in emerging market debt. So 2018 could be a challenge, not only for Latin America, but also for the Spanish companies and banks that have grown to depend upon it. By Don Quijones.
When the “hot money” gets antsy, a currency crisis morphs into a debt crisis. Read… As US Dollar & Interest Rates Rise, All Heck Breaks Loose in Emerging Market Currencies
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Who owns Santander ? It isn’t Spanish owned.
Yes, it’s a publicly traded Spanish company. Santander Consumer USA was partially spun off a few years ago via IPO in the US.
It would be hard to find a creditor with more toxic subprime debt than Santander Consumer USA.
No. They’re not hard to find. Three of them already collapsed ;-]
I’m amazed they found investors stupid enough to buy the IPO.
Arguably to be an investor in anything during these times is the very definition of stupidity. Perhaps they all know something we don’t i.e. the ultimate bailout is waiting at the end of this?
“High reliance on foreign subsidiaries in profit generation could imply significant vulnerabilities if the economic and financial conditions in host countries were to deteriorate.” Hh. I would never have believed it if the I.M.F. hadn’t said it…
We’re speeding toward that one world economy, where wage and asset values are in harmony. And the only way to get there is digital currency outside the control of G20 bankers and their political overlords. Or G20 overlords and political bankers. I expect it to be a bumpy transition, but if I was Argentina I would go take the Falkland islands once and for all.
Maybe they should go “ all in “ and take London instead
Maybe instead Argentina should ask the British to take them over. I doubt that the British bankers and politicians could be worse at managing Argentina’s economy than the present gang.
” but if I was Argentina I would go take the Falkland islands once and for all.”
Play wright into the British governments hands, give them the diversion from Brexit, they really need.
Also as Argentina has foolishly l used these diversionary tactics before, the British will have intelligence paying attention to this issue, when last time, they were not even looking.
It would be hard to find a creditor with more toxic subprime debt than Santander Consumer USA.
Its just been one shit-show after another since Tricky Dick pulled the $ off gold in August 1971. Congress didn’t have the stomach to reign in Johnson’s guns and butter wild spending. France called US’s bluff. And now here we are. Short humans, that’s what Nature will do.
If you are selling those shorts, let me know. Would be hugely interested.
Next US bluff will be the USD. When US will not pay interest anymore to foreign they simply print the old USD to foreigner and changing 1 to 1 for US citizen with USD in US banks. Make america great again
Relying on foreign credit, denominated in dollars, for infrastructure and development is like trying to live in the 21st century with 20th century economy and population. It can be pulled off only with extreme discipline, and sense of purpose, and just a few nations have that, Japan and Korea comes to mind.
Japan does not have to borrow in dollars. The yen is a hard SDR currency.
Many companies including Apple have sold bonds denominated in yen.
…and yet Japan is one of the most highly indebted countries in the world, if not the most indebted at close to 200% of GDP.
Yes it’s an advanced economy, and yes most of that debt is owed to it’s pensioners, but one thing I know is that such levels of debt are never a good thing. All it takes is one cold and the stack of cards can easily come down–just ask Greece.
In fact this article is a bit of a weird anomaly, because it’s not Latin America, or developing Eastern European, Asian, or African countries that will see in the next debt crisis–it’s going to be the developed economies. Italy too is one of the most indebted developed countries in the world, and now also the U.S., the UK, and a host of others. What happened to Argentina, Iceland, and Greece, may come to a developed country near you.
A digital currency may in fact be what saves the U.S.’s living standard so that what happened to Iceland, Argentina, and Greece, doesn’t happen here.
A country like the US or Japan cannot have a debt crisis, by definition, because it can always print more of its owns currency to service its debts. It can however have a currency crisis.
Argentina, Mexico, and other countries that have debts in foreign currencies get into debt crises because they cannot print those foreign currencies.
After 100 Years of civil war japan was united under the Tokugawa Shogunate.
It was totally BANKRUPT from day 1. Yet functioned perfectly in its environment for over 250 years.
Then America invaded Japan to force it to open to trade. As America wanted its own Hong Kong. Then America ran away to its own civil war. And financial Mayhem ensued.
The Japanese know how to run a bankrupt country successfully. Instead of throwing rocks at them, peopel should study them.
The first feature that becomes apparent is lack of Foreign debt (especially in Forigen currency). It is Forigen debt that has brought South America and Particularly Argentina, to its knees again and again. Argentina in Particular can not learn this lesson, and the IMF keeps on burying Argentina in more $ denominated debt.
Some peopel can not be told and keep returning to the same drug dealers again, and again. The drug in this case being supplied by the IMF.
They have not yet read the book, “Economic Hit Man”……might learn something.
Telefónica corruption is so blatant that if justice worked the company would no longer exist. They make Comcast look good.
So if this makes them go bankrupt my answer is, finally!
That said that will probably cause an Internet blackout in Spain and Argentina as there they are the main ptoviders.
But whatever happens, you can be sure that the rich will get richer, the people who work at these firms will be thrown out and the average man in the street, ie you and me, will end up bailing it out with our tax dollars and it’ll happen all over again. Many many times until we the voting taxpayers, say enough is enough.
Wonder why it only seems to be wealthy billionaires who end up in power in so called democratic western governments?? Doesn’t stink ever so slightly of an club most of us can’t get into? Seems we vote but the real power goes to lobbyists and the big corps behind them. And these are the issue, so they won’t agree to rules that affect themselves, so same old same old all over again.
The rich will get still poorer in spirit. We should pity them.
While the poor will inherit……… the Kingdom of Heaven. :)
Latin America has long gone through bouts of tumultous economic expansion, when even the humblest foreign investor will make money, followed by long spells of instability where only large firms with the needed political and economic firepower or investors with good local knowledge and especially connections can turn a profit.
No need to tell where we stand right now.
However Latin America, like all places going through social turmoil, is bound to fall prey to what I call “political scapegoating”, meaning the frantic search for heads to be offered on a platter to voters to distract them from the real causes of their woes (namely the political system they created in the first place). And too often these heads are foreign.
Of course one can argue that hiring lobbyists and expensive lawyers, not to mention bribing anyone in sight, will protect you. And you would be wrong.
Hugo Chavez did exactly that when he literally destroyed the mostly-foreign owned Venezuelan cattle industry for purely political reasons. Of course back then Chavez was a god and hence could not be criticized, especially abroad (shades of 60’s Mao-worship), and with Venezuela still not insolvent he could simply buy meat by the shipload from Argentina, Brazil and Uruguay to cover his own mistakes.
But now Chavez has gone to the Hall of the Damned and Venezuela is a financial pariah: if you don’t ask for either a large advance or even full advance payment you are just looking for troubles when dealing with them. This means meat, which once was exported all around the world, is now a luxury in Venezuela, especially the cities where it was once freely available at below-cost for purely political reasons.
I am sure Latin America will once again be white hot and everybody will make money again there, but it will take some time.
Who knows, perhaps this time around the people there will also learn something and perhaps if not break the cycle at least make it more manageable.
But until then, to quote an old investor’s dictum “Brazil is the country of the future, and will remain so for a long time”.
I thought the spirit of Chavez was last seen embodied in a little bird perching on the shoulder of Maduro, which helped him in the elections.
I haven’t seen that bird recently…..
(If anyone thinks I’m joking, check out the videos).
The old al-Muqanna tricks are still used in the XXI century? I am honestly surprised.
To cut a long story short Hashim al-Muqanna (Hashim the Veiled One) was the leader of a religious rebellion in Central Asia at the end of the VIII century. He was apparently a highly skilled stage magician who used his ability to convince would-be followers of his supernatural powers. One of his tricks (apparently leased from a another would-be prophet called Sinbad the Zoroastrian) was to have trained doves released by his assistants. These birds would then perch on his shoulders and he would go on to say they were the spirit of the immensely popular general Abu Muslim giving his blessings.
Al-Muqanna staged his final act when, cornered by his enemies, ordered a bonfire to be lit and threw himself into it, disappearing in a flash of light: apparently he had stuffed his robe with some sort of highly flammable substance to ensure a quick death. He literally went out in a blaze of glory as his surviving followers assumed he had burned off his mortal coil and literally ascended to Heaven.
I wonder if Maduro will try that trick…
Strange world when countries can borrow money mainly USD without any securities at all………….
Read all the comments. Humans get a few A’s and a few F’s in running the planet. It probably averages out to a C- over time. Be more realistic about human nature. You won’t be so disappointed.
“At the beginning of this year, both Mexico and Brazil faced an uphill struggle, with inflation high”
Inflation in Brazil isn’t high, actually it must be in long time lows and still surprising to the downside…
It’s also ebbing in Mexico.
People are so poor they can’t afford to buy anything. Companies lower prices because demand is low.
Aside from Argentina, most Latin American economies have low public debts. So if there is a debt crisis look to developed economies as they have most of it right now.
A debt crisis occurs when a country has debts in a currency other than its down. It doesn’t need a lot of debt of this type to get into trouble.
good comment Mr. Richter…..indebted in dollars to American banks….that’s been the story for more than 100 years between US and Latin/South America. Keep them indebted and on their knees to American banks……Strangle social change…….