Can Latin America Prevail Against Global Gales? (fwd)

[Robert Weissman <rob@essential.org>]

The Houston Chronicle 
September 27, 1998, Sunday  
BUSINESS; Pg. 1

CAN LATIN AMERICA PREVAIL AGAINST GLOBAL GALES?; Asia's economic turmoil has
spread to the region; can past reforms help it weather the storm or will 
history repeat?

DAVID IVANOVICH, Houston Chronicle Washington Bureau, ALEX BELLOS
WASHINGTON - The economic storm that blew through East Asia and
ravaged Russia is now whirling its way through Latin America. Despite the 
painful economic reforms enacted in
the region since the mid-1980s, foreign investors have been fleeing Latin 
America. Unlike the Mexican peso
crisis that began in December 1994, today's economic turmoil has not been 
isolated and may not be short-lived.
"The global environment is much less benign," said Nina Ramondelli, a senior 
vice president for Moody's
Investors Service. Much of East Asia is now mired in a severe economic 
slump, while even the long-robust U.S.
economy is slowing down. Emergency organizations such as the International 
Monetary Fund, which have
provided relief in other crises, are strapped for cash, while foreign 
investors have become extremely wary of
emerging markets. Already, economists are beginning to compare the current 
climate to the dark days of 1982,
when governments across Latin America defaulted on billions of dollars in 
loans and investors abandoned the
region for a decade. World leaders, having failed to stop the economic 
crisis as it spread from Asia to Russia, are
now trying to draw the line in Latin America. President Clinton has called 
for a summit of financial leaders to
address the crisis. The Inter-American Development Bank has approved a 
record $ 1.1 billion loan for the
region's largest economy, Brazil, while the head of the International 
Monetary Fund has vowed that "Latin
America will not fall." Any economic downturn in Latin America could have 
severe repercussions on the U.S.
economy. Companies based in the United States have been moving aggressively 
into Latin America in recent
years, and investors are now anxiously awaiting the release of companies' 
third-quarter earnings to discern how
badly the turmoil has affected their bottom lines. Last year, Mexico 
surpassed Japan to become the United
States' second-largest trading partner, while exports to the rest of Latin 
America rose 20 percent. For more than a
year, it seemed the world's economic crisis might bypass Latin America. When 
currencies across East Asia
started plummeting and economies from Thailand to Japan began slipping into 
recession, investors immediately
feared the crisis would hop the Pacific and affect the emerging markets of 
Latin America. While the trade ties
between Bangkok and Buenos Aires, Seoul and Sao Paulo are not sizable, 
investors worried the
commodity-dependent economies of Latin America would be dragged down by the 
overall slump in commodities
markets that accompanied the Asian crisis. The slowdown in the Asian 
economies also dampened demand for
some key Latin products, including copper from Ecuador and crude oil from 
Venezuela and Mexico. Investors
became agitated when they realized how much debt the Latin economies had 
accumulated - particularly from
American lenders - since resolving the debt problems left over from the 
early 1980s. The region's external debt
topped $ 678 billion by the end of 1997, up 42 percent from 1990, according 
to Moody's. U.S. companies, which
had been targeting Latin America in anticipation of closer trade ties, have 
far greater exposure to Latin America
than to Asia. U.S. banks had $ 46 billion at stake in the region as of June 
30, according to the bank rating service
Veribanc. But as the crisis toppled one Asian economy after another, 
beginning in July 1997, Latin America
impressed investors, both with its defensive posture and its staying power. 
After defaulting on loans in the early
1980s, several Latin countries spent years under the financial tutelage of 
organizations such as the International
Monetary Fund and the World Bank. While humiliating, these experiences 
prodded the Latin governments to
institute sweeping structural reforms that lowered trade barriers, 
privatized state-owned enterprises and reduced
budget deficits. Brazil has garnered $ 80 billion since 1991 from the sale 
of state-owned assets, including $ 19
billion this summer with the privatization of the sprawling telephone 
company Telebras. The experiences of the
1980s also taught Latin governments the kind of responses foreign investors 
want to see in times of crisis. In the
wake of the Asian debacle, Brazil, which alone accounts for an estimated 45 
percent of Latin America's gross
domestic product, launched an IMF-style austerity program. To entice 
investors not to pull their cash out of the
country, Brazil kicked up its interest rates to more than 40 percent. The 
prospect of such high returns persuaded
many investors that Brazil was worth the risk. And as investors became more 
assured, capital began to flow back
into the economy. Investors also took comfort from Mexico's experience after 
the devaluation of the peso in late
1994. The United States and the IMF reacted quickly to that crisis, lending 
Mexico hundreds of millions of
dollars and helping the country avoid a default. That fast response helped 
contain the crisis and avert a regional
selloff. "In fact, the successful handling of this crisis may have 
contributed to excessive creditor complacency
about future crises," Moody's recently told investors. As of May of this 
year, the effects of the Asian crisis on
Latin America were "relatively limited," officials at the IMF reported. 
Then, on Aug. 17, the financial markets
were shaken again as Russia defaulted on a portion of its debt. Suddenly, 
investments in all emerging markets -
and Latin America in particular - were suspect. "Where people before saw 
economic activity and growth, they
now saw risk," said Daniel Yergin, chairman of Cambridge Energy Research 
Associates and co-author of
Commanding Heights, a study of the global economy. Banks dramatically 
tightened their lending standards.
Investor enthusiasm for Latin American bonds evaporated. And Latin America, 
which had relied heavily on
foreign investment to fund its economic growth, was left without its ready 
source of cash. Credit rating agencies
such as Moody's downgraded the debt of Brazil, Venezuela and Ecuador, while 
it sent up warning flares about
Argentina and Mexico. The Malaysian government exacerbated concerns when it 
launched what was widely
viewed as the political persecution of one of that country's leading voices 
for economic reform. If Russia and
Malaysia could balk at reform, investors wondered, what might happen in 
Latin America? Brazil was suddenly
hemorrhaging more than $ 1 billion a day. The country's foreign reserves 
dropped from $ 75 billion in
mid-August down to around $ 48 billion last week. As the cash drain 
continued, the fear grew that Brazil would
be unable to meet its debt obligations. Foreign investors feared Brazil 
"used all its bullets against the enemy a
year ago," said Carl Ross with Bear, Stearns & Co. in New York. Again, 
Brazil raised interest rates to nearly 50
percent. For ordinary Brazilians in that country of 160 million, such 
interest rates mean many large purchases are
simply beyond their reach. "Because the interest rates are now at almost 50 
percent, customers won't buy on
credit any more," said Jose Umberto, who owns a car dealership in Rio de 
Janeiro. "We expect sales to drop
soon if the crisis continues. There already has been a change in mentality. 
People are thinking about their
finances with more care." Many Brazilians are more fearful of a devaluation 
of the currency - the real - and a
return of inflation, which a few years ago was galloping at a pace of 50 
percent a month. "I believe there will be a
devaluation, and I will lose out," said Rio publicist Amilton Motta Filho. 
"I bought a brand new car four months
ago in dollars. If the real falls by 20 percent against the dollar, my 
fixed-rate monthly installments become 20
percent more expensive. My family will really start to feel the pinch." 
World leaders concluded they had to act to
help protect Latin America. Clinton, citing "the worst financial crisis in 
half a century," called for a meeting of
finance ministers and central bankers from the industrialized nations to 
address the crisis. Brazil, because of its
dominance in the region, was chosen as the battleground. The IMF began 
discussions with Brazil about a
possible bailout, while the Inter-American Development Bank organized its 
own loan package. Many investors,
however, remained skeptical that, after pumping billions of dollars into 
Asia and Russia, the IMF has the
wherewithal to handle a Latin crisis. The U.S. House has only added to that 
wariness by refusing to provide
additional funding for the IMF. On Wednesday, Brazilian President Fernando 
Henrique Cardoso unveiled a plan
to raise taxes in an effort to curb the country's deficit. U..S. Treasury 
Secretary Robert Rubin and investors
around the world applauded the political courage of that announcement, 
coming just days before the Oct. 4
presidential elections in Brazil. That same day, U.S. Federal Reserve 
Chairman Alan Greenspan signaled the Fed's
willingness to lower interest rates. "Cardoso, Rubin and Greenspan bought 
Brazil some time," said one Clinton
administration source. "And by buying Brazil some time, they probably buy 
some time for the entire continent."
Other Latin governments also have responded to the crisis. Mexico, Colombia 
and Venezuela all have
announced budget cuts. The Mexican stock market has rebounded in the last 
couple of weeks, while the peso
has regained some ground. Venezuela, whose revenues have been clobbered by 
low oil prices, has promised to
cut expenditures by a whopping 30 percent. But with fears of a possible 
military coup there rising, Venezuela is
adding to jitters. As the crisis in Latin America continues, investors point 
out that economic times are far
different from the time of the Mexican peso crisis, when the United States 
and other nations were enjoying boom
times. Several Asian economies have been in recessions, if not depressions, 
for more than a year. And the ill
effects of the economic problems are starting to affect the U.S. economy. 
Moody's warned investors recently
that the downturn in the emerging markets may last far longer than the peso 
crisis. And the longer the turmoil
drags on, the greater the risks become.