LatinFinance - Special Edition - August 2013 - 64

my view is that latin america had a solidly-founded macro-framework and that solidity was the anchor of the strength of the economy
throughout this turbulent period.
these other aspects, such as liquidity provided by central banks,
fed swap lines and so on, were at particular moments an important
complement to the fundamental aspects of strong macro-policies.

TAKING A STAND: Latin America’s
“strong fundamentals” will protect it
from renewed volatility, says Mexico’s
central bank governor Agustín
Carstens

The picture has changed again as the global liquidity cycle looks
set to turn. What do you see as the principal risks here for Latin
america?
certainly this will create some volatility in the markets. But most
latin american countries have strong fundamentals to weather this
enhanced volatility. obviously we could have some turbulence in
the markets but would that create major damage to the economic
strength of the region? i don’t think so.
What is the main difference for Latin america today facing this
volatility as compared to 2008?
in 2008 a lot of the volatility in mexico and Brazil and other places
was due to some major corporates that had turned to very perilous
types of derivatives trades that exposed them, and our financial
markets, to more volatility.
all the authorities, and also the corporates, learned that that was
not adequate and not part of a responsible way of running business.
today the corporate sector and the banking sector is not exposed to
those types of positions. So an aspect that very clearly magnified the
external shock, the crisis abroad, is not present today.
the fed and the other monetary authorities will be extremely
careful in how they unwind their policies. the fed has bent over
backwards to hold the markets’ hand, telling them what they’re
thinking, so that most of the people are not caught by surprise. also
the unwinding of monetary policy will take place when there is
evidence that the US economy, and other economies, are stronger.
So the correction in the monetary policy stance should not be so
dramatic for the world economy because the correction in policy
will be a recognition that the reasons for such extraordinary policy
measures are not present any longer.

64 l atinfina nce.com - 25 Years - August 2013

©REUTERS

But without the external support, would strong macro-policies
alone have been sufficient to safeguard the region?
Well, that is mostly what has happened. for example, ample
liquidity in the world economy has helped from the point of view
that in the absence of it probably the collapse of the world economy
would have been worse. financial instability would have been worse
and that probably would have enhanced the severity of the storm we
are facing.
But all in all the liquidity that was provided has also led to some
important concerns for latin american countries, namely the rapid
capital inflows; it has generated challenges we didn’t necessarily
want.
in a way it has been a mixed blessing. Yes, it has, in a way, helped
the world economy. the strength of the recovery, especially in the
US, is due to the monetary policy actions the fed has taken. But at
the same time, these actions have had spill-over effects that we have
been forced to deal with.
overall, the policies that the fed and other central banks have
implemented are beneficial for the region, but i certainly wouldn’t
go as far as saying that we have sailed through this period with resiliency due to the liquidity injection by the central banks.

AGUSTÍN CARSTENS

“The correcTion in [US] moneTary policy STance ShoUld noT
be So dramaTic for The world
economy becaUSe iT will be a
recogniTion ThaT The reaSonS
for SUch exTraordinary policy
meaSUreS are noT preSenT any
longer”
But in most scenarios it would seem the rest of the world would
probably struggle more rather than less when liquidity is withdrawn?
Well i don’t think it would be appropriate to draw such a clear
distinction between advanced and emerging economies.
more than anything there are some particular markets that are
more vulnerable than others, for example high yield bond markets
might be more vulnerable – and that includes corporate high-yield
bond markets in advanced economies. So i don’t think it’s fair to

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