From the Group of 7 to the Russian default passing through the Latin American fiaca

 Beatrice E. Rangel
Beatrice Rangel

June says goodbye with new shocks for the world economy. On the one hand, the Group of Seven (Germany; Canada, United States, France, England; Italy, Japan) ended their meeting in the idyllic Bavarian landscape indicating to the world that they were indissolubly united behind the cause of Ukraine and that a competition with China begins for the development of new commercial routes with investments in infrastructure.

Both news negatively affect the world economy. Because as long as the conflict in Ukraine continues, to the same extent we will continue to experience severe dislocations in the energy supply chain and therefore prices will continue to be high and perhaps even higher. Paradoxically, this suits Russia because it can maintain its oil sales outside the sanctioned geographical area at prices similar to those prevailing before it began its invasion of Ukraine. Thus, Russia will continue to earn the level of revenue it may have placed in its 2022 budget, allowing it to continue the war effort while inflicting collateral damage on the West.

As far as the infrastructure investment initiative to develop new trade routes is concerned, although in the long term this initiative will be beneficial, in the short term it will fuel inflation. And the inflationary spiral has ceased to be a controllable phenomenon and has become a Lernaean Hydra that is devouring the income of the world’s middle classes.

In the middle of the meeting, Russia defaulted, which for the first time since 1918 stopped paying its foreign debt. This affects the entire international financial system at times of great weakness only comparable to that experienced in 2008 when the system of derivatives or mortgage-based structured bonds exploded. And even when Russia denies that there has been a default since it indicates that it has a way to pay its obligations, but cannot execute payments due to the sanctions imposed by the West, the cessation of payments affects the liquidity of many Western banks. And this happens at a time when the central banks cannot intervene in the financial markets because greater injections of liquidity are equivalent to pouring gasoline on the inflationary fire.

So the world economy is caught in several difficult dilemmas. And following the Russian default, one wonders if the absence of a solution to these dilemmas will cause a chain of financial crises in Latin America, a region that, on the contrary, Russia, is an expert in declaring defaults with most of its countries falling into this situation. more than nine times in its history. Could it be that we are going down that road again? If that were the case, the famous lost decade of the 1980s would pale in the face of the coming economic slowdown. And the question of the day is: will the trembling Latin American democracies withstand this jolt of fate?

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