New year, New Troubles

The news at the beginning of the year created an alert for investors in emerging countries, among these, Latin Americans.

What generates this preoccupation is the turbulence that appeared in the emerging countries markets, mainly Russia, Turkey, Brazil, Argentina, etc., as a consequence of the statements, first, and then the implementation, later, of the gradual abandonment of the “quantitative relief” policy to its economy, or simply of support on the part of the United States Central Bank (Fed), which has consisted in the reduction of short and long term interests rates and the purchase of US Treasury Bonds, undertaken to boost the recovery from the Great Recession that followed the burst of the real estate bubble and the fall of the financial system in the year 2008. While this “quantitative relief” was maintained current in the United States, where yields were almost zero, the strategists of worldwide investments searched for other places where there were rates that were more attractive for investment capital, which were the mentioned emerging countries. But, since the Fed began talking a couple of months ago, about abandoning this policy, which meant that interest rates would begin getting better in the United States, investors on their part began returning their capital to that country, taking it away from the emerging countries, a situation that has accelerated in the final weeks of January 2014. Meanwhile, the most notorious effect is the crash of the currencies in Turkey, Russia, Argentina, Brazil and Venezuela due to the massive sales of the positions that investors had in these coins (investments in shares quoted in the stock markets and sovereign bonds of these countries) and then had migrated them towards the United States Dollar. The thing that is feared next is a reduction in the economic growth of the emerging countries (and like in the case of Turkey, the beginning of a crisis with the risk of contagion to other very indebted countries, like Italy and Spain). Because of the lack of liquidity, the situation could come paired with an appreciation of credits for public and private projects in these countries. Prior to this dangerous scenario, not only for the countries directly concerned but also because of the risk that this can extend to others (as happened when the collapse of Greece a few  years ago, which threatened the stability of the Euro and all the Eurozone), the experts and the world’s monetary authorities, at the head of which the IMF has posited itself in the final days of the month, have petitioned urgent action from the emergent nations to start structural reforms in infrastructure, education and employment to increase their productivity. On the other hand, voices arise that complain that the United States does not take into account the damaging effects it’s monetary policy’s twisting’s have on the world’s economy, pleading them to coordinate the next steps with the affected countries, in order to evade the crashing of liquidity in the international market inducing a new cycle of bubbles.

This coming and going of the economic situation has been explained recently by Nobel Prize winner Paul Krugman who remembers the 1982 crisis in Latin America, in Asia in 1997 and the recent European one, created by the sudden suspension or flight of “swallow” capitals, which flowed initially to these regions when excess liquidity made investor look for more attractive yields, but it highlights the fact that the intervals are getting shorter every time and their effects are increasingly worse: Production fell 4% in Mexico in the 80’s crisis, 14% in Indonesia in the 90’s and more than 25% in Greece during the current crisis. And he concludes that the real problem lays in that the economies of the rich countries have not been able to handle their underlying weaknesses, to wit: its private sectors want to save a lot and invest little and their politicians hold on to austerity practices that do nothing but deepen the forces of depression.

On the other hand, the world scenario shines encouragingly. The United States affirms itself on its slow but stable growth process: its economy grew at 3.2% in the last trimester of 2013. In Europe, even though theory says that the real European Union has to go through a political integration, which does not seem feasible in the short run, steps are taken toward an integration of banking controls, and the Central European Bank has offered no cost insurance to buyers of bonds of the European Union, which will generate tranquility and confidence in the depositors and investors. Even though there are contrary currents that do not conciliate all the time, there is more talk about socialization of debts and a step forward is considered, which would be the emission of European Bonds that have the backing of all the Eurozone.

The investors in our region must prepare for a prospect in which China, which in volume got to be the first in the world, will have lower growth indexes that in the last years, which will surely impinge negatively in the prices of the supplies that have been exported there from Latin America, and that China will decrease its demand of first world products which, during the now ending recession, helped them to maintain their growth levels through their exports.

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