After the coronavirus, the risk of an epidemic of defects in emerging countries

Après le coronavirus, le risque d’une épidémie de défauts des pays émergents

Argentina and Lebanon have stumbled at the first, poor countries are in relief and of the members of the G20 are undermined by the rating agencies: the coronavirus will trigger there to be a series of defaults?

“There will be a number of shortcomings” after Argentina last Friday and the Lebanon at the beginning of march, explained to AFP a source accustomed to the negotiations of sovereign debt.

The two countries, which could not honour its financial commitments, were already in trouble before the pandemic.

“The question now is to avoid as much as possible, because the debt restructuring are still very expensive for everybody,” she added, expecting that other countries will find themselves soon in difficulty.

Cuba for example, which wants to suspend until 2022 repayment of its debt to the Paris Club, according to several diplomatic sources interviewed by AFP.

In a recent study, the us ratings agency Fitch has provided a “record of defects” States for this year, estimating that in 2017 – with three countries that were not able to meet their deadlines – was already “matched” with the case of the Lebanon, Argentina and Ecuador, countries that it considers to be in default.

For its part, the agency competitor of S&P has estimated that the plunge in oil prices had “weakened the fundamentals of the sovereign debt crisis, especially in countries which were already faced with rigidities in the budget, or that have relied on external financing, already before the epidemic”.

In the Face of fears that multiply to States deprived of the oil revenues or raw materials, the countries of the G20 have made the first step, by agreeing in mid-April to grant a moratorium on debt service (interest) for the 77 poorest countries of the planet.

“The idea is to save time and to allow to deploy all the margins available to deal with the crisis and its urgency”, stressed the source, who recalls that these elections will indeed be paid from 2022 on three years.

“This is clearly not the end of the story for these countries”, she acknowledged.

“It is likely that in 2021-2022, some of them must go through a phase of restructuring much deeper debt because it will become unbearable. In some cases, it could be already”, she added.

Domino effect?

But the fear the most important of the major emerging countries, some of whom are members of the G20.

For Ludovic Subran, chief economist at the German insurer Allianz, “some countries manage to keep a stable currency and to continue placing debt without a problem, being virtually pegged to values of the refuge” as the “bonds” of the u.s. Treasury.

Other, “of major emerging countries, such as Mexico, Brazil or South Africa will find themselves in a bit of a difficult situation and the credibility of their institutions will be tested”, he warned.

Since the beginning of the crisis, all three rating agencies (S&P, Fitch and Moody’s have lowered the rating of the South Africa, a country bogged down for more than a decade in a crisis, characterised by sluggish growth, deteriorating public finances, and mass unemployment.

Moody’s and Fitch have sanctioned, for their part, Mexico in mid-April. But S&P noted, however, that “the volatility has diminished” to some of the emerging countries, after the large outflows of capital that have characterized the beginning of the crisis.

Thanks to the policies very accommodative adopted by the central banks in Europe and the United States, many emerging economies have managed to maintain rates low, without increasing to protect their currency.

For Mr. Subran, it is now to prevent the defects argentine and lebanese spread. “I have the impression that everyone is going to tighten the elbows so that it’s not happening. The countries of the North have very little interest in leaving surging a wave of defaults. There would be too much to lose”.

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