Friday October 31 5:30 PM EST
Argentines fear long-awaited "Caipirinha effect"
By Axel Bugge
BUENOS AIRES, Oct 31 (Reuters) - Argentina, which nursed itself back to growth after the Mexican ''Tequila effect,'' on
Friday feared yet another headache caused by financial turmoil in its giant neighbor Brazil.
Analysts said the plunge in financial markets that ignited in Hong Kong and crossed the Pacific to Brazil had left Argentina at
risk of suffering the ''Caipirinha Effect,'' dubbed after Brazil's famous cocktail.
Brazil late on Thursday jacked up its benchmark interest rate to 3.05 percent per month from 1.58 percent to provide support
to its currency, the real.
That raised the prospect of slower Brazilian growth, denting Argentine exports to the largest consumer of its goods and
extending the crisis to more than just a stock sell-off.
''I am really worried about this crisis. It is no longer just a stock market crisis,'' said Paula Premou, head of research at Lopez
Leon brokerage in Buenos Aires.
Ever since the ''Tequila Crisis'' of 1995, when Argentina was forced into recession following the devaluation of the Mexican
peso, Argentine economists have been rehearsing the potential impact of a ''Caipirinha Effect.''
''What could happen in Brazil is very worrying for the Argentine economy because many companies that export have Brazil as
their main market,'' said Jorge Luis Di Fiori, head of the Argentine Chamber of Commerce.
The market turmoil, if sustained for another two weeks, is seen potentially reducing Argentine growth by 1.5-2.0 percentage
points in 1998, analysts say. Officials predict 5.8 percent growth in 1998 after 8 percent this year.
Argentine assets tend to slump when Brazil's markets fall as investors link the economies of the partners in the Mercosur trade
pact -- on Thursday both Brazilian and Argentine stocks posted parallel slumps of more than 9 percent.
The chief concern is devaluation in Brazil, which would make Argentine exports costlier and put pressure on Argentina for a
similar adjustment in the value of its currency.
Argentina's automobile, engine parts and processed foods could be the hardest hit while its biggest export, grain, could also
see volumes shrink.
''If the real falls, we will not get off lightly,'' said Aldo Abram, an economist at the Proeco consultancy.
Although some economists suggest Brazil's currency is as much as 30 percent overvalued, there is nearly virtual agreement that
the country will not weaken it.
President Carlos Menem said on Friday he was told by his Brazilian counterpart, Fernando Henrique Cardoso: ''If we
devalue, then you'll have to devalue and who knows where we will end up.''
A rise in bond yields and interest rates charged by banks lending to each other in recent days will soon trickle down to
consumers who will face higher mortgage and loan rates.
Analysts urged Argentina's government to take more active measures to prevent further potential economic impacts resulting
from contagion from Brazil's markets.
''If the Argentine government intends to maintain the (1998) budget it will have to make some expenditure cuts,'' said Sergio
Galvan, head of research at Bansud. An increase in yields of more than three percentage points on some government bonds
has already increased Argentina's debt servicing costs. |
