Financial panic now sweeping through South America

McClatchy NewspapersOctober 22, 2008 

WASHINGTON — While the United States wrestled with financial meltdown this fall, Latin American leaders often boasted that their economies were models of stability in an otherwise tumultuous global landscape.

Such confidence gave way, however, to panic this week, as the effects of the U.S. credit crunch and an international downturn wreak havoc on Latin America's formerly booming economies.

On Wednesday, Brazilian officials stoked investor fears by allowing the country's two biggest state banks, Banco do Brasil and Caixa Economica Federal, to buy stakes in private financial firms. Many of the country's largest banks have seen their stock prices plummet, while smaller banks have been strangled by the global credit freeze.

Just a day earlier, Argentina's government shocked the financial world by announcing it planned to nationalize the country's private pension system, which holds about $30 billion in assets, a move that conjured memories of the country's 2001 economic collapse.

Argentine President Cristina Fernandez de Kirchner said the nationalization was designed to protect people's pensions from market fluctuations. Most economists, however, read the action as a desperate bid to stave off government loan default in the face of diminishing tax revenues.

The governments of Chile, Peru and other countries in the region are also launching emergency initiatives designed to prop up banks and businesses. On top of that, financial uncertainty has stalled everything from planned deep-water oil drilling off the coast of southeastern Brazil to new iron ore mining projects in Peru.

The White House is trying to halt the slide by scheduling a Nov.15 summit of the so-called Group of 20 countries in the Washington area. The invited countries include Argentina, Brazil, China, Mexico and the European Union.

Yet many economists fear the global picture will get worse before it gets better and said Latin American economies face a grim 2009. Such fears grew on Wednesday as the Dow Jones industrials fell by another 514 points.

"There's no question Latin America is facing a recession," said Peter Hakim, president of the Washington-based think tank the Inter-American Dialogue. "These countries will just have to weather a sharp slowdown and recession with some countries such as Argentina and Venezuela facing something even more serious."

Like other developing regions, Latin America has been hit not just by the credit freeze but also by falling commodity prices driven by falling global consumption. Latin American economies depend heavily on commodities such as soybeans, wheat, petroleum and other exports to generate tax revenue and jobs.

U.S. companies will feel the pain too if Latin American economies slow because many U.S. firms rely on their Latin American operations to offset domestic losses. The booming Brazilian auto market, for example, has been one of the few bright spots for otherwise ailing U.S. auto manufacturers.

What's upset many Latin American leaders is that the economic troubles spoil what has been an unprecedented spell of stability.

With record commodity prices driving up export revenue and inflation falling to all-time lows, Latin American countries were building thriving credit and housing markets for the first time, and many economists had predicted that the region was finally leaving behind its tumultuous past.

The International Monetary Fund, for one, remains optimistic, saying Wednesday that Latin American countries were in a good position to withstand the global shocks. While warning of future deterioration, the report said, the region had not yet reached an economic downward spiral. The IMF predicted 3 percent regional growth next year compared to 4.6 percent this year.

"The region's resilience reflects the progress many countries in the region have made in improving their macroeconomic fundamentals over the past decade," said David Robinson, deputy director of the IMF's Western Hemisphere Department, according to a news release.

The situation in Brazil, however, could get dramatically worse because some Brazilian banks had engaged in the same kinds of risky practices that sank their U.S. counterparts, said Reinaldo Goncalves, professor of international economics at the Federal University of Rio de Janeiro.

Some banks, for example, did not conduct strict credit checks before approving loans and had overly exposed themselves to swinging international financial markets, Goncalves said.

Brazil's main Bovespa stock exchange fell by 10 percent Wednesday to its lowest level in two years, while the country's currency plummeted. Argentina's Merval stock exchange has fallen by 23 percent just this week.

"Today's action to rescue the banks showed the depth of the crisis," Goncalves said. "It was a positive move because it calmed the clients of these financial institutions. But the institutions were very fragile to begin with and are really being tested now."

Tyler Bridges contributed from Caracas, Venezuela, to this report.

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McClatchy Newspapers 2008

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