Six stories - 19 December 2024

Comments on Brazil's economy, El Salvador's IMF deal, Mexico's drug seizures, and Costa Rica's cybersecurity controversies with China.

Every Thursday, I send six short commentaries about politics and security around Latin America. I’m sending the first of the six stories about Lula’s economic problems to everyone today. If you work for a company or organization that needs more Latin America analysis, please consider becoming a paid subscriber to access all the content.

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Which country is more likely to default next: Argentina or Brazil?

You know the answer is Argentina. History shows the answer is Argentina. If you force the market to price out the risk via interest rates or credit default swaps, the market will price the risk in Argentina higher (pricing this out on an apples-to-apples basis can be hard given Argentina’s general screwed-up-ness and history of defaults, but that should also be a sign of the reality of the situation).

All that said, the vibe of the moment is that markets are convinced that Argentina is doing great while Brazil is in economic crisis this week. To be blunt, I think the optimism about Argentina is a stupid position over the medium to long term. But nobody cares about the long term when 2025 looms. And as I wrote last week, 2025 is going to be a year in which you can ride the optimistic hype wave of Milei in Argentina.

Brazil, on the other hand, is facing a fiscal reckoning right now. The market dislikes Lula’s budget policies. While most analysts don’t think Brazil is at imminent risk of a fiscal crisis (it will make all of its payments next year), everyone is concerned that everyone is concerned, and that has created a “bank run” style panic. Brazil’s currency plunged to below 6 Reais to the Dollar. Stocks are down. The bond market is hurting. And relatively high inflation (though still well below Argentina’s!) means Brazil’s Central Bank is planning more interest rate hikes while the rest of the world is cutting, which will be bad for next year.

One additional challenge is that while a random internet newsletter author can be like the guy pictured at the table above, Lula cannot be that way. Brazil’s president has a history of brushing off market criticisms as unfounded. He remembers everyone panicking when he became president in 2002 and then profiting as his government did just fine. But brushing off the market’s panic over fiscal deficits in 2024, as well as his lingering absence due to health issues, is just adding to the panic.

One big risk for Brazil in 2025 is that Lula, in poor health but as stubborn as ever, is going to want to stare down the market rather than symbolically give in on this debate. Whether or not Lula is correct about the general fiscal outlook, a market panic is a market panic. A Real at 6 or 7 to the dollar plus higher interest rates are going to cause pain to Brazilian businesses and consumers. The benefits of a devaluation will be few when so much of the export economy is driven by dollar-denominated commodities. The same way Milei benefits from the hype, Lula will suffer from the panic. Being correct in the long term won’t matter if the short term political challenges weaken his government.

According to Milenio, the Sheinbaum government is seizing fentanyl at three times the rate of the Lopez Obrador government. The country has also seen enormous cocaine seizures in the past three months that were quite rare under AMLO and the presidents before him.