The contagion metaphor often used in debt crises doesn’t really fit. It’s not like an overindebted entity “infects” healthy entities and the disease then spreads. The better analogy is a line of dominoes, and as one domino falls it knocks over a line of other dominoes, and all the dominoes represent overindebted entities. From Don Quijones at wolfstreet.com:
It’s not just countries that are at risk of contagion.
Economic history appears to be rhyming once again in Latin America. Perennial credit-basket-case Argentina was one of the first countries to suffer a major currency crisis this century. Now, its government has asked the IMF for a brand-new bailout. But if this classic last-gasp fix was meant to calm the markets, it isn’t working.
Previous Latin American debt crises have taught us two things:
- The direct impact on the general populace, already suffering from sky-high poverty rates, is devastating;
- Once the first domino falls, contagion can spread like wildfire.
The debt crisis of the early 1980s, which spread to virtually all corners of the region, famously paved the way to Latin America’s “lost decade.” Mexico’s Tequila Crisis of 1994-5 at one point became so serious that it almost brought down some of Wall Street’s biggest banks.
At the moment, as long as the US dollar and US yields continue to rise, emerging market jitters can be expected to grow. As British financial correspondent Neal Kimberley notes, markets often behave like predators, running down what they perceive as the weakest prey first — a role being filled, with usual aplomb, by Argentina.
Emerging market weakness is by now a generalized trend. The jitters could soon spread to Latin America’s two largest economies, Brazil and Mexico, which between them account for close to 60% of Latin America’s GDP. Both of the countries face general elections in the next two months. In Brazil the most popular presidential candidate, former president Luiz Inácio Lula da Silva, is running his campaign from behind bars, where he serves a prison sentence after having been convicted of corruption. In Mexico, the front runner, Andres Manuel Lopez Obrador, has the country’s business elite so spooked that it has launched a “Project Fear” against his candidacy.