Latin Finance - November/December 2011 - 14

global contagion risk

who is positioned defensively or for normalization, LatAm is where you want to be.” Overall economies remain in healthy shape, albeit with declining growth expectations. Some can still boast trade and fiscal surpluses, not to mention substantial firepower thanks to record reserve levels. “Needless to say, we will experience some turbulence because of the interconnectedness of the global financial market, but we feel our main financial variables will be anchored by the strong fundamentals,” Augustin Carstens, Mexico’s central bank head and former minister of finance, tells LatinFinance. Though the region is still reliant on foreign capital to grow, the development of local markets in countries like Mexico means both sovereigns and corporates now have an important alternative funding pool. Such efforts have gone a long way toward tackling the problem of “original sin” – a termed coined by economists Ricardo Hausmann and Barry Eichengreen to describe countries’ inability to borrow abroad or domestically in their own currencies. However, successes on this front have created their own challenges at a time when foreign investors have become increasingly enamored by local currency plays. These often crowded trades leave countries once again exposed to sudden movements in international portfolio flows, though this time borrowers need not fret about currency mismatches. “A lot of the selloff has been in those countries where the foreign position has been highest,” says Joyce Chang, head of emerging markets and global credit research at JPMorgan. Still, corporate Latin America remains an improving credit story, and in most cases CFOs have more than enough cash on hand to cover upcoming maturities should capital markets remain shut indefinitely. They are also now more constrained from taking the FX derivative bets that caused several corporates to implode during the last crisis.

from events in G3 countries has been broadly rejected, at least until the region can move beyond its reliance on commodity in exports, establish stronger domestic economies, and further reduce its need on foreign capital, say some observers. “Under the current conditions, there is a pretty good external backdrop for the most part,” says Javier Kulesz, chief economist for Latin America at UBS. “But if we move to a more hostile environment, LatAm will not decouple.”

Aside from FX and interest rate risks, borrowers and bankers alike have been wondering about the broader implications for European banks and how much they stand to suffer from a Greek debt restructuring and more turmoil in the peripheral euro-zone countries, not to mention higher capitalization requirements ahead of Basel III.

Bank Worries

LatAm is where you want to be: Abad Balance sheets and reserves might be stronger now than in 2008, but that is not a guarantee that the region is on the whole better prepared for a downturn, Kulesz says. The last crisis saw expansionary fiscal moves to soften the blow of the downturn, but that leaves government with less room for maneuverability this time around. “Emerging markets in totality have been, are and always will be price takers of G3 risk whether it is exchange rates or interest rates,” Abad says. “As awesome as balance sheet positions in LatAm are, the fact remains that if you see continued volatility, especially on the FX side, that is eventually going to crack some of the balance sheet position because it has really been a deep one way trade for the last few years into emerging markets.”

Forget Decoupling

Yet the notion that Latin America, or emerging markets overall, can decouple

Cost of funding and banks’ willingness to lend to Latin American credits in this environment has come under scrutiny, and borrowers are already feeling the pinch. “We are finding more and more clients turning to us saying they can’t count on so and so,” says one senior syndicate official in New York who works on emerging market bond issues. Less lending from European banks and moves to shore up capital are likely to result in a domino effect, with immediate and longer-term repercussion for Latin America. Asset sales among European banks would potentially have an immense impact on credit markets everywhere. European borrowers that have traditionally been reliant on bank lending may also push pricing higher as they seek funding alternatives elsewhere. “If they get forced into the bond market they are all going to the same investor base [as LatAm issuers],” says a senior banker at a US institution. “You can’t have that shift without impacting pricing.” European banks’ heavy involvement in infrastructure financing is not good news for the region’s efforts to raise trillions of dollars in this sector. The glaring absence of French banks in OSX’s recent $850 million FPSO loan may be a sign of things to come, and mean even more disintermediation amid efforts to bring infrastructure deals to the bond markets. In the medium term, export credit agencies and multilaterals will likely have to increase their lending role, particularly when it comes to supporting participation in infrastructure financing, says Valentino Gallo, global head of export and agency finance at Citigroup.

14 LatinFinance

November/December 2011



Latin Finance - November/December 2011

Table of Contents for the Digital Edition of Latin Finance - November/December 2011

Latin Finance - November/December 2011
Contents
Contagion Risk
Mexican Credit
China Investment
Loan Markets
Mexico Banks
Sub-Sovereign Debt
Banks of the Year 2011
Argentina Investor Report
Reversal of Fortunes
Latin Finance - November/December 2011 - Latin Finance - November/December 2011
Latin Finance - November/December 2011 - Cover2
Latin Finance - November/December 2011 - Contents
Latin Finance - November/December 2011 - 2
Latin Finance - November/December 2011 - 3
Latin Finance - November/December 2011 - 4
Latin Finance - November/December 2011 - 5
Latin Finance - November/December 2011 - 6
Latin Finance - November/December 2011 - 7
Latin Finance - November/December 2011 - 8
Latin Finance - November/December 2011 - 9
Latin Finance - November/December 2011 - 10
Latin Finance - November/December 2011 - 11
Latin Finance - November/December 2011 - Contagion Risk
Latin Finance - November/December 2011 - 13
Latin Finance - November/December 2011 - 14
Latin Finance - November/December 2011 - 15
Latin Finance - November/December 2011 - 16
Latin Finance - November/December 2011 - 17
Latin Finance - November/December 2011 - 18
Latin Finance - November/December 2011 - 19
Latin Finance - November/December 2011 - 20
Latin Finance - November/December 2011 - 21
Latin Finance - November/December 2011 - Mexican Credit
Latin Finance - November/December 2011 - 23
Latin Finance - November/December 2011 - 24
Latin Finance - November/December 2011 - 25
Latin Finance - November/December 2011 - China Investment
Latin Finance - November/December 2011 - 27
Latin Finance - November/December 2011 - 28
Latin Finance - November/December 2011 - 29
Latin Finance - November/December 2011 - Loan Markets
Latin Finance - November/December 2011 - 31
Latin Finance - November/December 2011 - 32
Latin Finance - November/December 2011 - 33
Latin Finance - November/December 2011 - Mexico Banks
Latin Finance - November/December 2011 - 35
Latin Finance - November/December 2011 - Sub-Sovereign Debt
Latin Finance - November/December 2011 - 37
Latin Finance - November/December 2011 - Banks of the Year 2011
Latin Finance - November/December 2011 - 39
Latin Finance - November/December 2011 - 40
Latin Finance - November/December 2011 - 41
Latin Finance - November/December 2011 - 42
Latin Finance - November/December 2011 - 43
Latin Finance - November/December 2011 - 44
Latin Finance - November/December 2011 - 45
Latin Finance - November/December 2011 - 46
Latin Finance - November/December 2011 - 47
Latin Finance - November/December 2011 - 48
Latin Finance - November/December 2011 - 49
Latin Finance - November/December 2011 - 50
Latin Finance - November/December 2011 - 51
Latin Finance - November/December 2011 - 52
Latin Finance - November/December 2011 - 53
Latin Finance - November/December 2011 - 54
Latin Finance - November/December 2011 - 55
Latin Finance - November/December 2011 - 56
Latin Finance - November/December 2011 - 57
Latin Finance - November/December 2011 - 58
Latin Finance - November/December 2011 - 59
Latin Finance - November/December 2011 - 60
Latin Finance - November/December 2011 - Argentina Investor Report
Latin Finance - November/December 2011 - 62
Latin Finance - November/December 2011 - 63
Latin Finance - November/December 2011 - Reversal of Fortunes
Latin Finance - November/December 2011 - Cover3
Latin Finance - November/December 2011 - Cover4
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