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.
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