Mexican president Felipe Calderón urged his Latin American peers to join him in biting the fiscal bullet or risk scrambling for credit when deficit-laden rich countries start to issue debt.
“These unprecedented deficits in industrialized nations are going to suck up enormous flows of credit for many years to come,” Calderón told an audience of finance ministers from across the region.
“For poor countries in Latin America and the Caribbean it will be very, very difficult to access [...] affordable credit,” he said.
He joined a chorus of voices this weekend issuing dire warnings that fiscally lapse countries face a far greater risk of being crowded out of credit markets when richer nations begin unravelling last year’s unprecedented fiscal and monetary stimulus.
Economists are particularly worried about an abrupt reversal of the so-called “carry trade”, by which investors such as hedge funds borrow from countries with low interest rates to invest them in fatter yielding assets elsewhere.
Mexico last year briefly stared into the fiscal abyss – left in the lurch by a drop in oil prices and facing a wide budget gap – despite having a reputation as one of Latin America’s most prudent countries in recent years.
To bridge the gap, Calderon’s government pushed through an unpopular tax increase, months before crucial gubernatorial elections where an emboldened opposition have an advantage.
The tax hike has contributed to a decline in Calderon’s popularity ratings. According to most polls, voters are more concerned about the economy than the horrific drug violence sweeping the country.
“Mexico did it, and at a significant ... political cost,” Calderon said of the bitter fiscal pill. “Other countries haven’t made the adjustment [...] and should make it, once the worst of the international financial recession is over.”
Economists give Mexico good marks for getting ahead of the curve, but are concerned about other countries, including some of the region’s largest.
Given the crowding out fears, Calderon welcomed the IDB’s capitalization increase. He said it was vital that the multilaterals, and in particular, the IDB, could step in to help the region’s development goals if private sector credit dried up.