Interview: U.S. interest rate hikes threaten peripheral economies -- Argentine expert

BUENOS AIRES, Oct. 5 (Xinhua) -- The U.S. Federal Reserve's (Fed) successive interest rate hikes threaten to deal a blow to its peripheral economies, resulting in higher costs of debt and capital flight, said Argentine economist Jorge Marchini.

"The effect is two-fold. The first is that many parts of (a country's) loans have flexible interest rates, so if the Fed's rate goes up, it drags all of the debt with it ... that makes the possibility of paying off the debt, the interest and the capital, harder," Marchini told Xinhua.

The Fed has recently raised the interest rate again in a bid to fight inflation, bringing the key overnight interest rate to a range of 3 percent to 3.25 percent.

Latin America is particularly vulnerable to such aggressive monetary policies, said the economist, citing the example of a similar anti-inflationary move of hiking the interest rate by the United States in the 1980s, which was catastrophic to the region.

The second major effect is "capital flight," Marchini said, referring to investors pulling out their investment from more fragile economies when they can earn higher interest in the United States.

"Given the change in rates, along with inflation and a complex global geopolitical situation, flight from risk means capital exits countries perceived to have less security and goes to the principal countries or financial markets," he said.

"The changes in the U.S. interest rate were so rapid that they have had a very immediate and evident impact on our economies," Marchini said, "especially on the balance of payments."

If the United States does not succeed in reining in inflation and the rate hike policy persists, it could lead to greater instability, mainly in countries that depend heavily on loans and credits, such as Argentina, said Marchini.