Even Turkeys fly when the winds are strong: ignore the hype about a new Latin American paradigm.

• Author: Lachman, Desmond

Among the more useful lessons that I learned during my six years on Wall Street came from a seasoned, if cynical, Salomon Brothers bond trader. He taught me that when the winds are strong even turkeys fly. He also taught me that the winds seldom stay strong for long and that when the winds die down the birds all too often come crashing down to earth.

If ever the winds have been strong for Latin America, it has to have been over the past two years. Not only did the global economy grow at its fastest pace in the past twenty years but global interest rates declined to their lowest level since the early 1960s. As if that did not provide Latin America with a sufficiently favorable external environment, not only did international commodity prices reach record highs but China emerged on the scene as a major importer of Latin American goods and as a major investor in the region.

In such a benign global environment, it should have come as no surprise that Latin American equity markets would boom to new record highs. It should also have come as no surprise that, in their desperate search for yield, global bond investors would drive down emerging market bond spreads to levels last seen before the 1997 Asian financial crisis. In that quest, these investors have not been particularly discriminating between good and bad Latin American credits.

What does come as a surprise, however, is that many investors now appear to be taking the market's present ebullience as an indication of the emergence of a new paradigm in Latin America. In their view, investment grade for the major Latin American credits is but around the comer. How quickly they seem to have forgotten the Argentine debacle of 2001, which constituted the largest sovereign debt default in history? How little do they seem to remember about Latin America's dismal history over the past hundred years of repeated debt defaults by all of its major countries?

What is also surprising is how little attention Latin American investors seem to be paying to the gathering storm clouds over the global economy. How long do they think that global economic growth can be sustained at its recent pace with international oil prices likely to remain at their currently heady levels? Or how long do they think that international commodity prices will remain well bid in a world in which the Chinese economy slows under the weight of its deep macro-economic imbalances and in which Europe stagnates at a time of internal...