BUENOS AIRES, May 5 (Xinhua) -- The interest rate hike made by the U.S. Federal Reserve (Fed), in response to the highest inflation in the United States in 40 years, could deal a blow to low-income countries and developing economies, Argentine economist Jorge Marchini said on Wednesday.
The Fed on Wednesday raised its benchmark interest rate by half a percentage point, the biggest in two decades, the professor of Economics at the University of Buenos Aires noted.
"The impact is enormous" especially for a country like Argentina, which is the largest debtor to the International Monetary Fund (IMF) following a record loan agreement with the global body, Marchini told Xinhua in an interview.
"But above all because there is an unbalanced balance of payments and any increase in interest rates, in this case in the United States, leads to significant imbalances," said Marchini, also vice president of the Foundation for Latin American Integration.
The Fed hike not only makes it harder, or more expensive, to service the loan but also stands to undermine confidence in Argentina. This can possibly trigger capital flight that would directly impact the exchange rate, he said.
"A rising interest rate obviously means a bigger (debt) burden," Marchini said, noting that Argentina's internal and external commitments are managed through variable rates set by the Fed rate.
"The second (imbalance) has to do with market confidence, with the repetition of a scenario that we saw in the 1980s in Latin America ... that is capital takes refuge in stronger currencies and abandons the local currency. These two elements can alter the exchange rate, internal interest rates and also the economy in general -- and that's a blow to the economy as a whole," Marchini said.
A similar anti-inflationary move in the interest rate in the U.S. in the 1980s was catastrophic for the Latin American region, Marchini stressed.
"While it was a circumstantial solution for the stabilization of the North American economy, it meant a great crisis in Latin America and a very strong change in relative prices," he said.
What's more, the Fed rate increase could strain ties between developing and lower-income countries in Latin America struggling with their respective balance of payments, by sparking "a competition to devalue the currency," which would lead to a "very delicate scenario with immediate impact" on their economies, said the economist.
The Fed decision also comes at a time when many countries around the globe have yet to recover from the shocks of the COVID-19 pandemic, he noted.
"Countries have taken on a lot of debt lately. The pandemic greatly increased the level of public debt in these countries, which went from just over 30 percent of gross domestic product (GDP) to more than 50 percent, and almost 60 percent on average in Latin America," said Marchini.
Governments face "allocating more of their fiscal accounts to just pay off debt" and "more limited" access to loans if "rising rates limit the ability to obtain new credits," he said.
Meanwhile, the fact that the U.S. dollar is the leading global currency gives the U.S. "great advantages," including the luxury of "managing monetary policy towards its own conditions, requirements and needs," said the economist.
However, that could change, Marchini said.
"The geopolitical change we are experiencing, the new trade conditions, the global inflation, which is also undergoing a moment of change, may give rise to a debate ... about how we stabilize currencies worldwide and about the role of the dollar," he concluded. ■
