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Strategies & Market Trends : Sharck Soup -- Ignore unavailable to you. Want to Upgrade?

To: Softechie who wrote (17761)	4/21/2001 10:29:34 PM
From: DebtBomb	Read Replies (1) \| Respond to of 37746

The seeds of a global recession April 20, 2001 The great danger of any economic slowdown is that it feeds on itself. We already see signs of this in the United States. Weaker consumer spending and business investment hurt corporate profits, depressing stock prices and confidence, which then harm consumer spending and business investment. The same thing can happen on a global scale. When things go bad, countries that were muddling along, despite huge problems, discover that they can no longer cope. Their budget, debt or trade troubles worsen, and the fallout spreads to other countries through lower imports or loan defaults. The potential for a chain reaction is why Argentina matters. It could trigger the next global financial crisis. Since late 1998 it has endured a stubborn recession. Unemployment is up from 13 percent to 15 percent, says the International Monetary Fund (IMF). The government of President Fernando de la Rua is wildly unpopular. Economist Charles Calomiris of Columbia University predicts the government will default on its debt of about $140 billion, much of it owed to foreigners in dollars. In a forgiving economic climate, a default might remain only a problem between Argentina and its many creditors (pension funds, insurance companies, investment banks, mutual funds). People would see it as an isolated breakdown. But that luxury no longer exists. The U.S. economy is flirting with recession; Japan is mired in stagnation. The upshot is that an Argentine default, by damaging trade and investment throughout Latin America, could worsen the global slump. Argentina has been a big borrower on international money markets. It accounts for about 20 percent of "emerging market" government bonds, says J.P. Morgan Securities. This equals Brazil's share and is ahead of Mexico's (15 percent) and Russia's (10 percent). An Argentine default would inflict widespread losses that might discourage creditors from making new loans or raise interest rates from their already stratospheric levels. The major threat is an abrupt slowdown of foreign capital to Latin America. Every major Latin economy is now running a sizeable current-account deficit. Broadly speaking, this means that their foreign earnings from exports, tourism and investment do not cover their payments for imports and debt service. In 2000 the deficits totaled 4.2 percent of gross domestic product (or national income) for Brazil and 3.3 percent of GDP for Argentina. The gaps are typically covered by foreign investment in the forms of loans, purchases of local stocks or direct investment (building factories or buying local companies). Decreased capital flows to Latin America would curtail world trade, whose growth in 2001 is already projected by the World Bank to drop by more than half from last year. Latin countries need foreign investment (in dollars, euros or yen) to pay for some of their imports. Less investment would cause them to cut their purchases from each other and from the United States, Europe and Asia. In 1999, for example, Argentina sent 24 percent of its exports to Brazil. Meanwhile, Latin America absorbed $142 billion of U.S. exports. Even without a default, capital flows to Latin America may drop, says economist Carmen Reinhart of the University of Maryland. They have consisted heavily of direct investment -- mainly to buy companies being privatized by Latin governments -- and lower U.S. corporate profits will squeeze these. An Argentine default would compound the damage. To Calomiris, it's not whether -- but when. The country, he says, can't generate trade surpluses large enough to cover the interest on its foreign debt, let alone repay maturing loans. In 2000 the interest payments totaled about $12 billion. Argentina has so far avoided default by borrowing more. In late 2000 the IMF agreed to provide a large new loan. At best, this is a stopgap. Calomiris thinks lenders will need to write down their debts by 25 percent to 30 percent. Of course, he could be wrong. In late March, President de la Rua appointed Domingo Cavallo as economy minister. In Argentina, Cavallo is a legendary figure, having eliminated the country's chronic inflation by creating a "currency board" in 1991. (This required that every peso of Argentine currency be backed by one U.S. dollar, preventing the government from inflating the money supply.) Since his appointment, Cavallo has persuaded Argentina's Congress to pass a package of tax and tariff measures that (he promises) will revive the economy by promoting investment and exports. The plan is full of contradictions, but perhaps it will work. Who knows? The larger point is that the next financial crisis may be less manageable than the last. With hindsight, the reason that Asia recovered so quickly from the financial crisis of 1997-98 was the U.S. economic boom. Asia could relieve its debt problems by exporting to the United States, and Americans' boundless confidence prevented bad news from feeding on itself. This time we may not be so lucky. signonsandiego.com