Saturday, March 13, 2010

Original Sin no more

It seems that Latin American countries are starting to atone for their original sins, or at least according to a new policy brief by the Inter-American Development Bank.

Original sin, the tendency among developing countries to borrow excessively in foreign currency (yes, academic economists like to come up with dramatic names for seemingly boring subjects), was a common culprit in economic crises during the 1990s. Long story short, countries found themselves with a lot of cheap foreign capital at their disposal and tended to borrow heavily in foreign currency and usually at very short maturities. The problem is that global capital flows can be rather fickle and often come to a sudden stop, unpredictably, leaving countries strapped for cash. Throw in a domestic currency crash and all of a sudden the value of your foreign debt explodes (a so-called "balance sheet effect"), leaving countries bankrupt.

So, the IDB now reports that Latin American policymakers have taken a "step in the directions of "safer" debt composition." Between 1997 and 2009 foreign currency debt as a share of total public debt has plummeted from 64% to 37%.

What is more, this "safer" level of foreign currency debt has not reversed since the onset of the global financial crisis, when the U.S. Fed started to flood the market with cheap funds. In other words Latin American debt managers have resisted the temptation to revert to old patterns and take advantage of all 'em cheap dollars. Now this is the part where someone else would tell you that this shows how the region is "maturing." But don't worry, I find that kinda talk far too patronizing and rather anthropomorphic since these are COUNTRIES we're talking about, not children for fucks sake. Anyway, RANT OVER.

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