Argentina and Venezuela are both potential candidates for default. Investors may be pricing in the risks in the two countries’ debt. But they seem too sanguine about the danger of 1980s-style contagion elsewhere in the region.
As part of a battle playing out in New York’s courts, Argentina said last week it may stop all debt payments to avoid paying holdout creditors from its last default 11 years ago – even though it is able to pay. Meanwhile under spendthrift President Hugo Chavez, Venezuela’s credit looks shaky. Ecuador, for its part, hasn’t returned to global markets since a default in 2009.
Credit default swap markets show how investors treat Latin American names as a group. Prices for CDS on Colombia, Peru and Brazil, for example, track each other closely, while there’s no strong correlation with other borrowers of similar credit standing like Indonesia and Bulgaria.
All that may be needed is a spark. Latin America’s debt crisis 30 years ago began with Mexico’s admission in August 1982 that the country could not service its debts. This dried up finance for other borrowers, even those such as Venezuela that had only moderate foreign debt in relation to GDP. Every decent-sized country in the region except Colombia defaulted between 1982 and 1984.
Overall, the economies concerned are in better shape today. In the 1980s, the big Latin American defaulters had external debts totaling 40 percent to 70 percent of GDP. Today all the largest names are near or below the bottom of that range, with more of the debt in the private sector. With interest rates at historic lows and credit readily available, they can also borrow freely.
In that context it’s not surprising that Ecuador’s last default and the recent difficulties in Argentina and Venezuela have, generally speaking, had political origins. Financial considerations like the deficits and high interest rates of the 1980s are lesser factors today.
But a surprise populist election victory or, say, a destabilizing slump in key commodity prices could still surprise markets. Add a “risk-off” mood, perhaps stoked by rumbling trouble in Europe, along with the unreliable foreign-debt track record of Argentina and Venezuela, and it’s not hard to imagine another round of regional defaults. The last major episode may predate the Web, but investors could still benefit from Googling it.