An Unintended Consequence of Uncoordinated International Monetary Policy on Central America

This research explores causes and implications of the foreign indebtedness of Central American countries in the 2010s, that is, during what has been defined the second phase of global liquidity, marked by the quantitative easing (QE) of central banks in developed economies. Looking at their balance of payments and their contemporary sources of funding, we find that the international bond market became an important source of debt for Central American economies during that decade. We also find that non-financial corporations’ foreign bond issuance has been increasing in some of the countries under study, even though less than in larger emerging economies. Classifying these countries’ international debt securities by residence and nationality of the issuer, we identify another peculiarity with important implications about financial fragility. In fact, as opposed to what occurred to larger emerging economies, the general governments issuing foreign bonds has been a more relevant source of risk than the issuance by financial and non-financial corporations.