When Russia announced a moratorium on its debt payments and a rouble devaluation, Latin American debt traders had only one thing to say: "The markets are closed."
Venezuela's $100 million 20-year issue came to market in July and is likely to be the last Latin sovereign issue for at least four to six months, say bankers. "Every single deal is being pulled," says one. "They are on hold indefinitely."
The question is how long Latin American sovereigns, not to mention the lesser-quality corporates, can survive without tapping the international capital markets. "The outlook for the rest of the year is not pretty," says Matthew Duda, senior emerging markets strategist at CSFB.
Venezuela still needs another $1.5 billion to pay off maturing corporate and sovereign bonds during the rest of 1998 and $2 billion in 1999, reckons CSFB. It was already widely considered the weakest of the Latin governments and its credit outlook was lowered to "poor" in early September by Standard & Poor's and downgraded a notch to B2 by Moody's Investors Service. "They are now doing asset shuffling between government departments," says one banker. "That will hold them through November and December, but they will be pressed if markets keep them out much beyond that."
Argentina also has pressing needs - $1.7 billion worth of sovereign and corporate refinancings fall due this year, and $10 billion in 1999, says Javier Murcio, chief economist for Latin America at CSFB in New York. Argentina has said it can stay out of the markets for some time. Others aren't so sure. The country has a Dm1 billion ($565 million) sovereign issue due on October 5. "Take what they say at face value," says one banker, "they'll start feeling the pressure in November and then they'll have to go to the loan markets."
The sad reality is that Argentina has the best macroeconomic fundamentals in Latin America, says Goldman Sachs analyst Jorge Mariscal. But that hasn't stopped its debt from getting creamed. Thirty-year bonds that were trading at 350bp during the first quarter had climbed to 615bp by mid-August. In early September Moody's put Argentina's sovereign debt on a negative credit watch.
Murcio says that Argentina will probably only have to raise $4 billion to $5 billion next year in the international markets, and can finance the rest of its needs domestically. Fortunately it was able to raise close to $2 billion in the fourth quarter of 1997. "That was geared to covering much of their financial needs for 1998." he adds. "They had the foresight to get as much as they could."
Brazil's situation is more complex. Like Venezuela's, its debt was downgraded by Moody's a notch to B2. According to S&P, it has some $23.7 billion in foreign debt due next year, which includes loans from multilateral institutions and commercial banks. But CSFB says that only $5.8 billion of that is in the bond market, including $3.2 billion that will mature outright and $2.6 billion in bonds that mature between 2001 and 2004, but can be put by investors next year. Another $400 million is puttable in 1998, plus $380 million due outright.
A bigger problem may be its internal debt, which Goldman Sachs estimates at nearly $280 billion in short-term real denominated debt, the majority indexed either to the US dollar or overnight domestic interest rates. Less than $10 billion of it is in the hands of non-residents. "If they can keep rolling it, they don't need to be in the external markets," says one banker.
But the drop in world equity markets means that the government can no longer count on raising $11 billion through privatizations. Duda suggests that if capital markets don't reopen, investment and social spending will have to be cut in order to finance debt service.
Mexico, though also placed on a negative credit watch by Moody's this month, appears to be in somewhat better shape. CSFB estimates that $1.4 billion in corporate and sovereign bonds comes due before the end of 1998, and another $2.7 billion in 1999. According to S&P, total foreign debt due in 1999 comes to $15.3 billion.
Even though Mexico has jumped through hoops to appease the capital markets since the peso crisis of 1994-95, it hasn't escaped the bloodbath. The country was forced to cancel a regular Monday auction of government treasury bills, known as cetes, for the first time since the peso devaluation in 1994. Most Latin American strategists and bankers view the current situation as graver than the 1994-95 peso debacle. "In hindsight, that turned out to be largely a regional issue," says one managing director. "We now have a global emerging markets crisis to deal with and possibly a global bear market too."
Bankers are left hoping that some good will come out of it. "The market has to change completely," says Ignacio Sosa, managing director of BancBoston Securities. He argues that the 0.5% underwriting fee that used to be made on a 10-year Brazilian deal won't return. "Bankers argued they would save on volume, and kidded themselves they could hedge the exposure by managing with Brady bonds," he says. "But the fact of the matter is that they were not getting paid for the risk." As more banks exit the market in the months and year ahead, he says the fees are bound to rise. "We're sure as heck not going to get paid a half a per cent any more." Famous last words. Michelle Celarier