Latin America’s Plight

The Scourge from Spain to the USA

April 30, 2001

In 1492 the Americas boasted highly advanced indian civilizations of the Aztecs, Incas and Mayas. They were builders, farmers and even had their own calendar. Then along came a man called Christopher Columbus. Since then it has been virtually all downhill for the Americas…today better known as Latin America.

Italian mariner Columbus was financed by the reigning power of the known world in that era: the crown of Spain. Queen Isabela and King Fernando commissioned adventurer Columbus to discover unknown lands thought to lie far beyond the horizon. However, his specific goal was to bring back gold and silver to help finance the warring Conquistadors Españoles acquire yet more land in Europe. To be sure Columbus may have entertained more altruistic objectives, but his royal orders were more mundane: "Bring back gold." The ruling powers of the known world needed the material wealth of the Americas. That was true in 1492…as it is painfully so today.

Indeed many Spanish Conquistadors who followed in Columbus wake pillaged much of the gold and silver hoard of the Aztecs, Incas and Mayas. The Conquistadors did not trade for gold, they killed for it. It was nothing less than brutal rape and pillage.

Little has changed in the last 500 years. The reigning world powers continue to suck the 'lifeblood' from the Americas (Latin-America). This lifeblood consists of Latin-America's only wealth: COMMODITIES…raw materials (material prima) – its mineral and agricultural wealth. Whereas Latin-America is blessed by God with an over-abundance of minerals and agricultural products, it has never been able to create a manufacturing base which could compete with the North-American and European industrial behemoths.

Normally, comparative economic advantages of mineral and agricultural wealth would produce a stable financial and monetary business environment. But when it comes to Latin America there is a big fly in the ointment. The North-American and European industrial colossus control the price of COMMODITIES. To be sure, there is no more rape and pillage. The process of relieving the Latin-Americans' of their mineral and agricultural wealth is far more subtle, deceptively simple but effective. Commodity prices have been maintained at very low levels for the last 20 years, which is at odds with the obscene inflation of prices in the industrialized world… and especially the stock markets of the world.

This defies all economic logic.

International Banks act like "Johns" enticing Latinos to sell their souls.

If control of commodity values via derivative manipulation were not enough, there is yet another insidious way the world's manufacturing centers "maintain" stable low prices of needed raw materials (especially those from Latin America). World banks foist massive loans upon the hapless Latinos, which the latter can never hope to amortize. Latin America cannot repay these crashing loans precisely because world prices of their mineral and agricultural wealth is at 20 year lows.

CONSEQUENTLY, the Latin Republics are forced periodically to devalue their currencies. And since all their foreign debt is denominated in the US greenback, it makes loan repayment a Herculean impossibility. Not only is principal reduction severely curtailed, but even annual interest payments have a painfully pernicious effect upon its foreign reserves. Last year, 85 percent of the Argentina's foreign currency earnings were dedicated to debt service payments.

Latin-America is literally between a rock and a hard spot, or as we say, "entre la espada y la pared."

Gaucho/Samba CRISIS not unlike MexicanTequila Crisis

Someone on the net aptly labeled it the Gaucho/Samba/Taco CRISIS, which is presently brewing in Latin America. It is the burgeoning foreign debt owed by Argentina, Brasil and Mexico. It portends to convert into a "pesadilla financiera" (financial nightmare) for major international banks. Argentina alone owes $150 billion - and it is the smaller of the three Latin Republics.

Argentina pulling rest of Latin America down

Many traders fear that Argentina's sluggish economy could force it to default on its debt or devalue its currency, which some think would spark investors to withdraw holdings from around Latin America.

Argentina's struggle To contain crisis
(excerpts from a BBC article)

Argentina's Finance Minister, Domingo Cavallo, is striving to reassure the markets

"Another financial crisis with great risks for the global economy is looming, this time in Argentina. As BBC NewsOnline's Emma Clark explains, the repercussions could be serious.

Argentina owes billions of dollars to international investors and unless it can win more time to pay it back, the country could plunge into crisis, bringing other emerging economies down with it.

Debt burden

Argentina's ability to continue borrowing money to pay off maturing debt is key.

The country's total foreign debt amounted to $150 billion in 2000 and it needs to borrow $20 billion this year in order to service EXITING DEBT.

Argentina's bond debt alone accounts for almost one quarter of total emerging market bonds.

This means that any investor with a neutral portfolio of emerging market bonds would have a 25% exposure to Argentina.

A default or massive crisis of confidence in Argentina could prompt such investors to sell off investments in other countries to cover their positions.

Within days, the world could be facing a major financial crisis, on the scale of 1998, which was sparked by Russia's default on domestic debt.

Too 'awful' to contemplate

"If the worst-case scenario came true in Argentina, the consequences would be very serious," says a foreign bond expert.

Investors are demanding higher interest on money they lend, she says, which in turn exacerbates Argentina's attempts to service its debt. Argentina's bonds are so discounted that they yield more than a 1,000 basis points above equivalent maturity US Treasury bonds – i.e. they provide a current yield of 16%-22%. The grossly exaggerated current yield reflects the inherent RISK OF DEFAULT.

Argentina has one of the highest debt service ratios in the world. It means that Argentina is very susceptible to foreign investor confidence shocks

Argentina's debt represented 44% of its gross domestic product in 1997. At the end of 2000, it was 54%.

The root of Argentina's problems

The country, which is the world's 29th largest economy and Latin America's third largest after Mexico and Brazil, slipped into recession after a 50% devaluation of the Brazilian currency in 1999.

The weakening of the Brazilian currency (called "real") put the squeeze on Argentina's trade with its neighbor. This has caused inventories to explode, resulting in massive employee layoffs and production shutdowns.

The fact that Argentina's own currency is tied to the US dollar, which remains strong, has also hurt its competitiveness. Not a few monetary mavens are forecasting a severe devaluation, freeing the peso for its US greenback mooring – allowing it to regain lost export markets and its past Brazilian trade.

In light of the above, international bond rating services have relegated Argentina's bonds to 'Junk bond' status. To be sure investors have turned skittish and started to dump Argentine bonds as well as those of other emerging markets.

Argentina going to hell in hand basket

Argentina's Economic Plight Deepens

Cancellation of Debt Sale Undermines Confidence in Emerging Markets

Argentina's economic problems put concern about emerging-market economies into the spotlight recently as investors dumped Argentine bonds amid growing fears that the country would not be able to meet payments on its $150 billion of debt.

The darkening clouds surrounding Argentina's bonds are casting an ominous pall over existing debt of all Latin-America, especially Brasil and Mexico. International experts estimate total Latin-American debt tops $500 BILLION.

There is grave concern a Gaucho/Samba CRISIS will trigger a global financial fiasco not unlike the Mexican Tequila Crisis of a few years ago. In the event that just one country declares a moratorium on its foreign debt, it will spread like wildfire throughout all Latin Republics from the Rio Grande River (Mexico's border with the US) to the Tierra del Fuego (Argentina's southern most tip which borders the South Pole). IRONICALLY, the entities who will suffer the most will be the very greedy banks which underwrote the loans. Poetic justice if there ever was!

Solutions to Latin-American Crushing Debt Problem

There are only two viable solutions:

  • World financial institutions must forgive the debt en masse, or
     
  • Allow commodity prices to rise to a level consistent with the values of manufactured goods, which have inexorably risen during the last 20 years.
     

Although the first solution will provide immediate relief to Latin-America, there is little chance international financial institutions will swallow this draconian loss. In fact it might even topple one or two or three of them. Therefore, there is only one viable and acceptable remedy to Gaucho/Samba CRISIS: Give the Latinos the means to pay off their debts via the production and sale of their commodities…i.e. their mineral and agricultural wealth.

Latin- America's Mineral and Agricultural Wealth

This writer briefly touched on this topic earlier. However, it is imperative to paint a more detailed picture.

As previously mentioned Latin-America is blessed with an enviable abundance of mineral and agricultural wealth. It possesses vast deposits of oil, iron , aluminum, gold, silver…even diamonds. Furthermore, it has the capacity to be the world's 'bread-basket' - as it enjoys fabulously favorable weather, plentiful sun and abundant water to cultivate the production of wheat, corn, cattle, poultry and lumber. What Latin-America does not have are commodity prices that reflect world economic realities.

Analyst "Zelotes" penned an erudite report ( The Great Commodities Bull of the 00's ) which clearly demonstrates that commodity prices – as measured by the CRB Index – are at 20-year lows at current value (but at an all-time low when adjusted for inflation).

It is painfully obvious to any student of Econ 101 that Latin-America can never pay its crushing debt as long as its mineral and agricultural wealth is undervalued (a precios de gallina flaca) in world markets vis-à-vis the manufactured products and services produced by the colossus to the North and in Europe. In essence, the harder the Latinos labor, the more they sink into the 'financial hole' dug by international bankers.

In this writer's considered opinion the more industrialized nations have diabolically controlled commodity prices during the last two decades. From a commercial point of view their objective is quite understandable. It is nothing personal, just good business (para los Norteños y Europeos). Indubitably, world manufacturers strive diligently to maintain stable the cost of the raw materials that go into their finished products (cars, heavy-equipment, appliances, etc etc).

Pathetically ironic, the emerging nations literally finance the industrial growth of the world's richest countries – the same countries which burden Latin-America crushing loans that can never be repaid UNDER THE PRESENT UNJUST PARADIGM OF LOW COMMODITY PRICES.

Commodity Prices Must Rise

If international banks entertain any realistic hope of ever collecting Latin-American debt, they must allow COMMODITY PRICES TO RISE to levels consistent with manufactured product prices. And if the heretofore financially myopic international banks dally too long in allowing raw material prices to rise, the Latin-American Republics "agarrarán el toro por los cachos" (will take the bull by the horns) will declare a moratorium on all foreign debt. Frankly, I would relish seeing these bankers get stuck holding the bag of defaulted loans (…que los banqueros pagarán el pato).

The following comparison makes the economic disparity crystal clear. During the last 20 years the Dow has soared 1,375% from 800 to its March 2000 peak at 11800 peak. In stark contrast the CRB Index has hopelessly floundered around its current level of 214 – showing ZERO PRICE GROWTH. How can that be?! Something is dramatically wrong!!

If you are an objective and honest reader, ask yourself: "What type of living standard could you offer your family if your income was stuck at a level reached 20 years ago?"

The crux of my report in a nutshell is this. Industrialized nations must relinquish their control over commodity prices. They must permit commodity price levels to rise in order to allow Latin-America to repay its crushing debt. To be insensitive to this dire need will eventually inevitably lead to a moratorium on $500 billion in foreign debt. Woe to US and European bankers if this should occur.

An open letter to International Bankers

Señores Banqueros:

En el supuesto caso de que Ustedes no permitirán subir los precios de la materia prima, entonces comerán los préstamos…$500 Billones de ellos.

(Messrs. Bankers: If you do not allow commodity prices to rise, you will eat your loans…all $500 Billion!)

24 karat gold is pure elemental gold.