The Bolivian president’s declaration of a state of emergency has sent a jolt through the Square Mile, as investors scramble to price in the risk of a regional contagion that could hit British assets. For those of us who have watched Latin America’s boom-and-bust cycles for decades, this is a familiar script: a populist government, a depleted treasury, and the sudden realisation that the party is over.
The immediate trigger appears to be a spike in social unrest, with protests erupting in La Paz and Santa Cruz over fuel price hikes and currency devaluation. But make no mistake, this is not just a local squabble. Bolivia sits on the world’s largest lithium reserves, a commodity that is central to the global energy transition. British pension funds and mining companies have been quietly increasing exposure to the region, betting on political stability. That bet has now blown up.
The gilt market, which usually ignores events in the Andes, did not ignore this. The yield on the 10-year gilt ticked up 3 basis points in afternoon trading, a sign that the risk premium on UK assets is rising. Investors are asking: if Bolivia can unravel, what about Peru? What about Chile? The domino effect on British investment trusts with exposure to emerging markets could be severe.
The government’s response has been predictably interventionist. The Bank of England’s Monetary Policy Committee, which meets next week, will now have to factor in a potential spike in energy costs if lithium supply chains are disrupted. That is inflationary, and the doves on the committee will have a harder time arguing for rate cuts.
But the real test is fiscal responsibility. The British government’s own borrowing costs are already elevated, and a flight to safety from emerging markets could push sterling higher, hurting exports. The Chancellor should resist any temptation to throw money at the problem. The era of bailouts is over. Investors who piled into Bolivian bonds on the promise of resource nationalism must now face the music.
This is a wake-up call for the City. The world is a dangerous place, and the assumption that democratic institutions in Latin America would hold firm has been proven naive. The state of emergency in Bolivia is a reminder that in financial markets, there is no such thing as a safe bet.
