- “Hot Money” Flees Latin America, Triggers Currency Bloodbath, Risk of Mega Debt Crisis
by Don Quijones, http://wolfstreet.com/
The script of the current dramas besieging the global economy was written seven years ago. It was written when the world’s biggest central banks, with the Federal Reserve leading the way, decided to combat (or at least postpone) an endemic banking crisis by flooding the globe with countless trillions of dirt-cheap dollars, euros, yen, pounds, Swiss francs, and yuan.
With most developed economies stalled and their engines flooded, part of this “hot money” went elsewhere, and much of it poured into the fast-growing developing and emerging markets of Latin America, where it chased high-yield risks that would have been unthinkable, were it not for the newfound abundance of cheap money.
Coinciding with China’s seemingly insatiable thirst for commodities, this sudden glut of global liquidity helped transform Latin America into one of the world’s fastest growing regions. Western corporations, banks and investors also benefited along their way, as their high-yield emerging market investments more than compensated for the lackluster opportunities offered by the stagnating economies of Europe, North America and Japan. For many Spanish multinationals, the region is now the most important source of revenues and profits [read: Downturn in Latin America Mauls Spanish Companies, Threatens Spain’s “Recovery”].
However, seven years after the world’s central banks embarked on the biggest money printing spree in recorded history, the movement of funds has begun reversing — and at a vicious rate!
Blood on the Bourse
With the exception of sub-Saharan Africa – it accounts for half of the 10 worst-performing currencies this year, and its foreign exchange reserves are a 10th or less of the emerging market average – no region is more vulnerable to this reversal than Latin America.
The region’s currencies have just registered their largest cumulative drop in 22 years, as El Financieroreports, a worse performance than during the Financial Crisis or even amidst the region-wide chaos triggered by the collapse of the banking sector of Latin America’s second largest economy, Mexico, during the 1994 Tequila Crisis.