Tuesday, May 11, 2004

While there were many underlying fundamental causes to the 1982 Latin American debt crisis, the immediate cause was the dramatic rise in US interest rates known as the "Volcker Shift" which pulled investment capital out of Mexico and into the US. Much the same thing happens to Mexico again in 1994; the peso crisis hits after the US Fed jacked up interest rates six times and 225 basis point in under a year.

As the Fed looks to hike US interest rates multiple times this year and as early as next month, it looks as if this ugly spectacle may be preparing itself for a command performance.
A jump in US interest rate expectations has dealt the heaviest blow to emerging market (EM) debt . . .

the downward spiral in emerging market bond prices had brought the focus on the market as investors in other fixed-income securities feared contagion.

"What worries them is that this isn't driven by emerging market-related factors but global interest rate expectations," he said.

Dominique Audin at Swiss-based Pictet said: "Emerging market bonds remain a very good early indicator of liquidity and risk-appetite. The market is worried about risk, and this concern will probably spread."

. . . cheap money fuelled a dramatic fall in investor risk-aversion, driving emerging market and high-yield corporate bond yields to new lows. But the prospect of higher borrowing costs has knocked the stuffing out of speculative investors, and the fear is spreading to longer-term investors, such as pension funds. . . .

Yields on bonds issued by Latin American governments such as Ecuador, Peru and Brazil have also risen sharply, although the selling has been marked by its breadth, involving even the highest rated issuers, such as Russia and Mexico.
When the US sneezes, the Global South catches cold -- and then some.


Post a Comment

<< Home