IMF Western Hemisphere Director Nicolas Eyzaguirre Speaks at EMTA Spring Forum
Nicolas Eyzaguirre, the IMF’s Western Hemisphere Director and the former Finance Minister of Chile (2000-2006), was the distinguished guest speaker at EMTA’s Spring Forum, hosted by HSBC Securities (USA) on April 30, 2009.
Mr. Eyzaguirre, paraphrasing the IMF’s Managing Director, noted that in order to solve the global economic crisis, one has to find out “who the real killers are,” and he then identified excessive leverage and excessive risk-taking as the culprits. Part of the solution—though not all—is “fixing banks, and fixing balance sheets in the US and Europe,” according to Eyzaguirre.
The IMF, he noted, has reemerged with a central role in economic finance despite recent talk of its irrelevance. “No other organization could fill the niche of helping make a coordinated response,” he stated, and the G-20 has given the IMF a clear mandate to do so.
Eyzaguirre called for those nations with “fiscal space” to use it. The IMF, he acknowledged, also needs to “put its money where its mouth is,” and is doing so via its new Flexible Credit Line (FCL) mechanism. The Fund has already lent the “astronomical” figure of $61 billion to Mexico, Colombia, El Salvador, Guatemala and Costa Rica with “more to be expected.”
Eyzaguirre reviewed the IMF’s different loan options. The FCL is available to those countries which are viewed by the Fund as not needing to alter any policies, and involves no conditionality. The list of countries which are eligible for FCLs is purposefully ambiguous, he admitted, as “by shedding light on some countries, you cast shadows on others.” The HAPA (high access precautionary standby loans) is another option and involves some conditionality. There are also emergency loan packages available.
In the near-term, Latin importers in the Caribbean and Central America are seeing improved terms of trade as commodity prices have fallen from their peaks. Inflation-targeting, commodity exporters such as Brazil, Mexico, Chile, Colombia and Peru are, in contrast, losers in a weaker commodity market. However, the hardest hit are those without rules-based macro policies – “guess what they did with the extra revenues during the recent commodity boom; they are feeling the most pain.”
Latin America is, in general, performing in tandem with G-7 countries. This is a marked contrast to the past, when a slowdown in the G-7 would have a large multiplier effect in Latin America, with these typically suffering a more severe contraction. In fact, Latin economies were likely bottoming out “as we speak,” perhaps as much as nine months earlier than their G-7 counterparts.
Following his formal remarks, Eyzaguirre took audience questions. He described BRIC bond negotiations as going well, and pointed out that their increased liquidity would be a welcome market development. He also stressed that the solution to the US banking crisis was not perfectly clear, but that May would prove an interesting month as the US Treasury released stress test results.
Pablo Goldberg of HSBC Securities (USA) moderated the event’s panel discussion. Are we out of the woods yet, he asked? Felipe Illanes (Banc of America – Merrill Lynch Research) responded “definitely not; we have moved away from a very dangerous place but we still don’t have a consumer demand-driven recovery.”
Mike Gagliardi (Halbis Capital Management) opined that “we are away from the worst, but this won’t be a straight-lined recovery and it will be regionally-based.” Gunter Heiland (JPMorgan Asset Management) believed that “we are out of panic mode” although he expressed skepticism that “Central Banks have gotten it.” He also pointed to potentially solvency issues. ING Financial Markets’ David Spegel speculated that the market had probably reached a nadir when investors were too paralyzed even to take advantage of arbitrage opportunities.
Goldberg noted the recent role the S&P 500 index has played in driving investor sentiment. Panelists agreed that the index probably would not retest its lows, although many expected profit-taking after its recent rebound. Had enough action been taken in the US to solve the banking crisis? Gagliardi expressed confidence that “they are throwing the kitchen sink” at the problem. He also noted the irony of the US having to navel gaze after years of the G-7 telling EM countries, via the IMF, how to reform their economies.
Panelists also discussed potential monetary easing in EMs. Illanes personally saw possible rate cuts of as much as 275 bps in Hungary, 250 bps in Brazil and 200 bps in Peru “because they were late in the cycle.” Spegel seconded that cuts were possible in Brazil. Gagliardi noted that this tool still existed in EM countries, while it had been exhausted in the G-7. As for buy-and-holds until December 31, 2009, Heiland would buy BRL but would shy away from corporates.
On the other hand, Spegel and Gagliardi viewed corporates as attractive on a risk-return basis, Spegel citing a 500 bp pickup over US high-yield plus Brazilian support of its corporate bond market. Gagliardi would also buy Argentina’s untendered debt, Naftagaz (“I think they will pay, but maybe I am naïve”) and would short US Treasuries (“which has been dangerous for a long time.”) Illanes preferred EM equities.
As for potential surprises in 2009, Illanes predicted that the lack of political conflicts during a period of economic turmoil would be unusual. Gagliardi suggested “sovereign consolidation” might occur within the CIS.