Spanish Banks’ Layered Latin Letdown

With West European banks’ Latin America exposure just behind their overwhelming Eastern one which parents are already paring, Spanish giant Santander’s decision to shed its large Chile unit may be a harbinger of regional selloffs elsewhere. It is also a major player in Argentina and Mexico as well as Brazil, where according to the BIS, euro-area bank claims of $285 billion represent almost one-quarter of local credit. Cross-border bond allocation has also been high, with Latin issuers representing one-third of this year’s near $200 billion external total by JP Morgan calculations, with a sizeable high-yield contingent and a handful of defaults and restructurings already underway. Q3 company earnings offered a hint of coming difficulties with currency depreciation losses. Chilean peso volatility had previously worsened on copper price worries, with China taking the bulk of exports in a commodity relationship mirrored by neighbors. It is a top trading partner likewise for Argentina, Brazil, Colombia, Peru and Venezuela, and 15 percent of outward investment went to the hemisphere, double the amount five years ago. Raw materials are essential for feeding the dual property and infrastructure boom, which Beijing official and overcapacity forces are moving to correct. The twin concerns combined to keep the Santiago, Bogota and Lima bourses, which are now tracked on a new joint MSCI index, off double digits through November. Chilean President Pinera a year after mounting a rescue operation for trapped miners has seen his popularity plummet on unmet demands for increased public education spending as the central bank projects lackluster 4 percent 2012 GDP growth. Consumer inflation is close to that figure, and unions are pressing for a 9 percent annual wage increase. However interest rates could still be cut if global conditions darken, even as the $12 billion peso support program may not be renewed.

Colombia, on the other hand, has raised rates slightly and reinstated an intervention band with inflation in its upper target range and credit and real estate looking frothy. Oil and mining FDI will exceed $10 billion this year boosted by Washington’s ratification of a long-pending bilateral free trade pact. Venezuelan commerce could pick up with expected stimulus there ahead of presidential elections, but the FARC rebels remain a threat after several army attacks and appointment of a successor to its veteran leader killed in combat. Peruvian president Humala, after a rocky start, has maintained an approval rating above 50 percent amid community protests over environmental damage and revenue sharing in metals projects. A new royalty formula has been proposed that is more industry-friendly than original versions with the guidance of cabinet technocrats and former business executives, but opponents warn that his populist luster will soon again be revealed.