An Unintended Consequence of Uncoordinated International Monetary Policy on Central America

Abstract

This research examines the change in the pattern of foreign indebtedness of countries in Central America in the 2010s and its relation to the second phase of global liquidity generated with the implementation of rounds of quantitative easing (QE) policies by developed countries after the 2008 economic crisis, as well as its implications. Drawing on an analysis of the Central American countries' sectoral balances, their historic dependence on bank lending, and on their contemporary sources of funding, we find that the international bond market has become an important source of debt for these economies in the last decade but that, in contrast to the case of some big emerging economies around the world, the role of non-financial corporations' foreign bond issuance is not so relevant in the case of Central America. By classifying these countries' international debt securities by residence and nationality of issuer, we also identify another difference with big emerging economies and conclude that the financial fragility of some of these countries has been exacerbated more by the general government's foreign bonds issuance than by the financial and non-financial corporations' ones.