thestreet.com on Latin America. Barton Biggs likes Brazil (see bottom)
thestreet.com
Moody's Pushes Latin
America Closer to the Edge
By Peter Eavis
Senior Writer
9/3/98 5:48 PM ET
Latin America's battle to avoid a full-blown currency and debt
crisis suffered a nasty setback today when Moody's cut
sovereign ratings for Brazil and Venezuela and said it may
do the same for Mexico and Argentina.
The region, already entering a grinding recession as a result
of the emerging markets crisis, now threatens a
Russia-style default and devaluation. Latin America
accounts for 20% of U.S. exports, more than trouble-hit
Southeast Asia and Eastern Europe combined.
In addition, U.S. banks and multinationals are estimated to
have a lot at stake south of the Rio Grande. Around a 10th
of revenues at banks Republic New York (RNB:NYSE) and
J.P. Morgan (JPM:NYSE) came from Latin America last
year, according to Credit Suisse First Boston.
Markets in Brazil, which accounts for nearly half of Latin
America's GDP and is considered to have the most
precarious economy in the region, went into free-fall after
Moody's announced its downgrade of the country's main
rating to B2 from B1.
The Bovespa, the Sao Paulo stock exchange's benchmark
index, sank 8% to 6219, which is 55% off its 52-week high.
Telebras (TBR:NYSE ADR), the country's telecom
bellwether, collapsed by nearly 10% to 65 5/8, its lowest
level in over two years.
Moody's said in a press release that recent market volatility
makes it more difficult for the Brazilian government to
sustain a policy mix consisting of "tight monetary policy,
loose fiscal policy, a strong real and a slow pace of
structural reform."
Investors are worried by the country's fiscal deficit,
equivalent to a huge 7% of GDP, and the fact that 40% of
the country's $250 billion domestic debt is coming due in
September and October. Adding to the uncertainty are the
presidential and congressional elections scheduled for Oct.
4.
Moody's also downgraded Venezuela to B2 from B1, saying
the country had failed to stem the outflow of hard currency,
cut its budget deficit or control domestic liquidity. And the
agency put on negative watch Argentina's Ba3 rating and
Mexico's Ba2 rating, partly because of a tightening in
international liquidity.
TSC reported earlier this week that Brazil, Mexico and
Argentina face problems refinancing the estimated $120
billion in debt coming due by the end of 1999.
Despite the increased jitters of late, big-name Wall Street
strategists, while acknowledging the going is getting
tougher, are still sticking by Latin America. In an Aug. 31
report Barton Biggs wrote: "Brazil is going to make it, but
the rise in the risk premium for developing countries is going
to make the road more difficult." |
