Monday, October 07, 2013

U.S. Brinkmanship and Latin America

Via Lane Crothers: There are some members of Congress--we don't know how many--who believe that defaulting would be good. From Rep. Ted Yoho:

If the debt ceiling isn’t raised, that will sure as heck be a moment. “I think, personally, it would bring stability to the world markets,” since they would be assured that the United States had moved decisively to curb its debt.

Take this from the Latin America angle. Defaulting would likely do the following:

Failure by the world’s largest borrower to pay its debt -- unprecedented in modern history -- will devastate stock markets from Brazil to Zurich, halt a $5 trillion lending mechanism for investors who rely on Treasuries, blow up borrowing costs for billions of people and companies, ravage the dollar and throw the U.S. and world economies into a recession that probably would become a depression. Among the dozens of money managers, economists, bankers, traders and former government officials interviewed for this story, few view a U.S. default as anything but a financial apocalypse.

We even have a Brazil reference. Latin America is deeply tied to the U.S. economy in pretty much every way conceivable. I cannot imagine any way it would end up being anything but negative for Latin America.

Yoho is extreme, but the debate over the debt ceiling is still worrisome. From the American Enterprise Institute:

How many other GOPers are Yohovians? Hopefully not too many. Because to believe in Yohonomics, you have to believe that no matter how deep and quickly and haphazardly government spending is cut, the private sector would seamlessly and instantaneously pick up the slack. And there would be a lot of slack. Goldman estimates the revenues Treasury will receive in the month following the October 17 deadline would equal only about 65% of spending going out, “implying a far greater fiscal pullback than will occur as a result of the ongoing shutdown.”

And this will hurt Latin America from the obvious ripple effects. Here is Standard and Poor's from back in 2011 when we were having a similar debate:

We expect that the Latin American region would be hard hit by a U.S. downgrade or default, with the magnitude depending on the duration of the global disruption, especially with regard to liquidity flows and heightened risk-aversion. Further, the ramifications to the economies of Mexico, Central America, and the Caribbean, where trade, remittance, and tourism-related links to the U.S. are substantial, would reverberate even more significantly than elsewhere in the region, in our view.

It's safe to say that Latin American leaders are looking at this with some combination of trepidation and disbelief. Or maybe not so much disbelief. After all, Latin American presidentialism has periodically produced minority factions with a strong sense of entitlement that run roughshod over everyone else.


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