Covid’s long Latin tail
The markets have been very relaxed about emerging markets adopting quantitative easing – and that, in itself, could become a problem.
If quantitative easing is seen to be ‘cost free’ by policymakers, then what has started out as a one-time emergency policy response could be used next time the economy is sluggish and the fiscal accounts are tightened.
After all, low growth is an emergency for an unpopular government approaching an election. It’s existential.
Now, the constitutional barriers to QE across Latin America are being torn down. And QE precedents are being set. It’s not called slippery slope for nothing, even if there appear to be sufficiently stark warnings from case studies like Argentina – of central banks financing treasury deficits – to urge extreme caution in this area.
Some bankers place this tail-risk in the ‘purely theoretical’ risk bucket, at least for now. Which is understandable: international investors are far more driven by the wall of liquidity unleashed by the QE programmes from developed market central banks – liquidity that is seeking yield that isn’t available in sovereign bonds other than those in the emerging markets. But are local investors signalling problems ahead?
Take Brazil, for example. The central bank recently transferred R$325 billion to the finance ministry – with more possibly to follow – and there is concern about the government’s ability to finance itself in the local market
Brazil hasn’t even pushed its Selic interest rate to the zero bound (it is at 2% nominal – a negative real rate) and there are early worries about its debt profile.