Could Latin America's economic turmoil be a replay of the Asian crisis?
>>"Let's face it. The dominoes are falling again," said David Wyss, chief economist at Standard & Poor's in New York. "Before we thought Latin America would not be a replay of Asia and now we are hoping it is only Asia in 1997-98 and not something worse."<<
By MARTIN CRUTSINGER, AP Economics Writer
WASHINGTON (AP) -- The conventional wisdom has been that South America 2002 is not Asia 1997-98 when financial crises spread like wildfire from country to country, toppling 40 percent of the global economy into recession.
But with the recent turmoil in Uruguay and Brazil, following Argentina's record debt default last year, some economists are worried that the conventional wisdom may be wrong.
"Let's face it. The dominoes are falling again," said David Wyss, chief economist at Standard & Poor's in New York. "Before we thought Latin America would not be a replay of Asia and now we are hoping it is only Asia in 1997-98 and not something worse."
Financial markets in a number of South American countries have been in turmoil in recent weeks, with interest rates soaring and currency levels plunging. The situation is beginning to look eerily like the previous Asian crisis, in which troubles in Thailand in 1997 quickly spread throughout the region and then jumped to Russia.
Russia's bond default and botched devaluation of the ruble in the summer of 1998 sent shock waves through Wall Street, triggering steep declines in stock prices and the near collapse of a huge American hedge fund.
It wasn't until the Federal Reserve engineered a series of rapid-fire interest rate cuts that calm was restored.
The scary thing, some economists say, is that this time around the situation could be more dire. The Asian crisis occurred during a time when the U.S. economy was soaring; after the Fed rate cuts and the return of market stability, American consumers kept on spending, helping serve as a growth engine for the rest of the world.
But now the United States is struggling to emerge from last year's recession and the worst bear market on Wall Street since the mid-1970s.
Not only is the United States unlikely to serve as an engine of growth the way it did in 1998, South American countries are facing much bigger problems than those encountered by their Asian counterparts.
"The economic fundamentals are not as good in South America as they were in Asia," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis. "Asian countries have high national savings rates while Latin American countries are much more dependent on foreign borrowing."
Already, Argentina has been forced into the biggest government default in history, halting payments on the bulk of its $141 billion in foreign debt last December.
Now investors are worried about the possibility of a default in Brazil, with its even bigger foreign debt burden of $264 billion.
Concerns about a possible Brazilian debt default, along with comments by Treasury Secretary Paul O'Neill about the threat of aid money being diverted to Swiss bank accounts, sent Brazil's currency plummeting to record lows last week.
O'Neill's rhetoric was more muted, however, as he made a whirlwind visit to the region, praising the economic efforts being made to contain the crisis.
The Bush administration, increasingly concerned about the deepening problems in Latin America, has been moderating its opposition to IMF bailouts and directing U.S. assistance to countries in trouble.
During his stop in Uruguay on Tuesday, O'Neill received thanks from President Jorge Batlle for the $1.5 billion loan the U.S. Treasury provided this week to allow the country to reopen its banks. It was the administration's first direct assistance to a country facing economic trouble.
O'Neill also expressed support during earlier stops in Brazil for that country's efforts to increase its IMF credit line, already at $15 billion, to calm investor worries in advance of the October elections.
IMF teams are currently negotiating with both Brazil and Argentina, which is mired in the worst financial crisis in its history, over the conditions for new loans. Analysts believe both countries will receive new IMF loan packages very soon, given the change of heart by the Bush team and the IMF's desire not to be blamed for further destabilizing financial markets.
"There is still a possibility the financial contagion could spread further if markets are not calmed," said Sohn. "With the United States still struggling to emerge from a recession, that could affect us at a very vulnerable time."
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