NEW YORK – International credit rating agency Standard & Poor’s (S&P)? is warning Caribbean countries that they will be affected by the new fiscal policies of European banks.
“The Caribbean remains particularly vulnerable to Europe and its effects on US economic activity, given its weaker starting position vis-à-vis Latin America,” said the Wall Street-based firm in a new report.
It said Barbados, Curacao and Grenada, which depend most on European tourism, could suffer disproportionately.
“Moreover, deleveraging among European banks would have consequences globally,” Standard & Poor’s said, noting that after Europe, the Caribbean, even excluding some key offshore countries, had the largest exposure to foreign banks.
It said that for some of the regional countries, it was 100 per cent of their gross domestic product.
“Most of this exposure takes the form of more foreign currency denominated cross-border claims, rather than in local currency and locally funded deposits,” Standard & Poor’s said.
It said capital flows to the region would “no doubt be hurt initially” amid higher global risk aversion and since Europe was a significant funding source.
“Recovery would depend on emerging market growth, which we expect to outperform that of the advanced economies and on continued supply of liquidity by central banks in the advanced economies,” Standard & Poor’s said.
“This was the pattern in 2009-2010 when there was a strong rebound in inflows,” it added.
In a deep recession, Standard & Poor’s said the region had less room for fiscal policy stimulus this time around.
“In a downside scenario, we would expect more aggressive countercyclical policy responses from Latin American governments and central banks than from their Caribbean counterparts,” S&P said.
“Initial currency depreciation, likely to coincide with commodity price declines, for those sovereigns with floating exchange rates could limit how aggressively central banks cut interest rates,” it added.
Standard & Poor’s said that while both Latin America and the Caribbean were less able to create fiscal policy stimulus than pre-2008, this might not impede governments’ actions, especially in the context of even larger fiscal imbalances in the advanced economies.
“And although the absence of a quick return to higher commodity prices may provide relief for Central America and the Caribbean’s commodity importers, an even slower and subpar global recovery would no doubt provide its own strain on Latin America and the Caribbean,” it said.
“In short, Latin America and the Caribbean aren’t set for clear sailing,” Standard & Poor’s added. (CMC)
