How Chinese prevented Latin America defaults in 2000s..

Chinese troubles everywhere.

Here is a speech from Sebastián Claro of the Central Bank of Chile on the Latam linkages with China. This one is interesting as apart from current Chinese woes it also mentions the importance of China factor in 2000s:

He says in start of 2000s most Latam economies were looking like defaulting on their debt.


Let me begin by recalling a widespread debate in the region in the early 2000s. While Europe was boastfully launching its new single currency, Latin America was struggling to leave behind the havoc of successive crises that had hit the region, starting with Mexico in 1994. The meager growth of the late 1990s and early 2000s, plus the accumulation of large current account deficits during the 1990s, caused the region to begin the new century with relatively high levels of debt-to-GDP.

For example, at the end of 2002 Brazil’s government debt reached 80% of GDP while its external debt was close to 55% of GDP. In every other country in Latin America – with the exception of Chile –, the debt of the general government exceeded 40% of GDP. Moreover, large current account deficits persisted throughout the region. Take the year 2002, when Mexico and Peru – as well as Bolivia and Costa Rica – had accumulated 5 years of current account deficits of over 2% of GDP.

Econ research indicated default:

Doubts about the sustainability of national debts across the region fueled an academic debate as to identifying the highest level of debt that could be tolerated. In a 2003 paper by Carmen Reinhart, Miguel Savastano and Kenneth Rogoff – which has been part of a successful research program on the history of debt crises –, the authors examined the history of defaults around the world, and concluded that relatively low levels of debt-to-GDP were enough to trigger credit restructuring events.2 In particular, the paper found that several countries in the region had debt levels above the limits of what could be deemed “tolerable”. 

The authors also provided evidence of how countries – in Latin America and elsewhere – have historically used deleveraging to regain a sustainable path for their external debt. Their conclusion is clear: “For debt-intolerant countries, sustaining access to capital markets can be problematic unless debt ratios are quickly brought down to safer levels. To assess how such ‘deleveraging’ might be accomplished, we examine how, historically, emerging market economies with substantial external debts have managed to work them down. To our knowledge, this is a phenomenon that has previously received very little, if any, attention. We analyze episodes of large debt reversals, where countries’ external debt fell by more than 25 percentage points of GNP over a three-year period. Of the twenty-two such reversals that we identify for a broad group of middle-income countries since 1970, two-thirds involved some form of default or restructuring. Only in one case – Swaziland in 1985 – was a country able to bring down a high ratio of external debt to GNP solely as a result of rapid output growth.” Thus, in the early 2000s, there were widespread expectations that a default would occur.

However, the scenario did not pan out. Why? China factor:

Overall, the history of Latin America in the 2000s did not go as expected. During the first decade of the twenty-first century, Latin American countries succeeded in lowering theirlevels of external debt by nearly 20 percent of GDP. The current-account balance, which had exhibited a secular deficit during the 1980s and 1990s, posted a surplus of nearly 2% of GDP during the 2000s. A review of the fiscal ledgers yields similar numbers.

What happened? What was the miracle? In a word: China. China’s strong growth began to permeate international commodity markets early in the decade, leading to an enormous increase in the region’s terms of trade beginning around 2004. This major increase in income enabled the economies to deleverage without having to make large adjustments to expenditure or output. Also, the real exchange rate appreciated by almost 20% with respect to trading partners during the 2000s, which contrasts with the greater stability of the 1990s.

Of course, better macroeconomic policies contributed markedly to this success. Whereas previous income booms had been accompanied by strongly pro-cyclical economic policies that incubated problems, this time greater efforts at fiscal saving, more exchange rate flexibility and better banking supervision helped the countries take advantage of the high commodity prices. But for a large part of the region, the seed of the success of the 2000s was sown by China.

The speech continues with drawing challenges for Latm economies and risks from China slowdown..

One Response to “How Chinese prevented Latin America defaults in 2000s..”

  1. Tirath Muchhala Says:

    Nice. The far-reaching effects of the China story… Wonder what the repercussions would be when there is an actual slowdown in that economy

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