A Latin crisis to rival Asia?
Martin Crutsinger
The Associated Press
Thursday, August 8, 2002
Fears of a 1998 replay
WASHINGTON The conventional wisdom has been that South America in 2002 is not the same as Asia in 1997 and 1998, when financial crises spread from country to country, toppling 40 percent of the global economy into recession.
But in view of 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 Corp. 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 several South American countries have been in turmoil in recent weeks, with interest rates soaring and currency levels plunging. The situation is beginning to resemble the Asian crisis, in which troubles in Thailand in 1997 quickly spread throughout the region and then to Russia.
The Russian bond default and botched devaluation of the ruble in 1998 sent shock waves through Wall Street, triggering steep declines in stock prices and the near collapse of a large American hedge fund. It was not until the Federal Reserve Board engineered a series of rapid 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 when the U.S. economy was soaring. After the Fed cut rates and market stability returned, American consumers went on spending, helping serve as a growth engine for the rest of the world.
But now the United States is struggling to emerge from a 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, but 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. "Asian countries have high national savings rates, while Latin America countries are much more dependent on foreign borrowing."
Argentina has already been forced into the biggest government default in history, halting payments on the bulk of $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 the U.S. Treasury secretary, Paul O'Neill, about the threat of aid money being diverted to Swiss bank accounts, sent the Brazilian currency plummeting last week.
The Bush administration, increasingly concerned about deepening problems in Latin America, has moderated its opposition to bailouts from the International Monetary Fund and directing U.S. assistance to countries in trouble.
IMF teams are currently negotiating conditions for new loans with Brazil and Argentina, which is mired in the worst financial crisis in its history. Analysts have said both countries will receive new IMF loan packages 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," Sohn at Wells Fargo said. "With the United States still struggling to emerge from a recession, that could affect us at a very vulnerable time." |
