Brazil: The banks party through the crisis
Duhalde was quick to make it clear that he did not intend Argentina to default on its debt obligations. But Brazil's devaluation in January is still fresh in the minds of investors and after two years of wondering where the next emerging-markets shock will come from, the markets remain jittery. Unfortunately, elections loom in three of Latin America's biggest economies, Argentina, Peru and Chile. Traditionally, in Latin America, elections mean three things: politicians make populist statements, governments loosen the purse strings and capital flees.
In many ways Latin America - or at least South America - is suffering an economic crisis as bad as that in Asia. Although the region has endured repeated financial shocks in recent years, this is the first time for 15 years that the continent as a whole has suffered recession. Brazil's devaluation has brought Ecuador and Colombia to the brink of economic collapse, has put untold strain on Argentina's economy and has even pushed Chile's previously robust economy into sharp recession.
In contrast to Asia's economic crisis, which forced itself onto the world's attention in 1997 in a sudden clattering of falling dominoes - and unlike Russia's, which exploded into life with the announcement of a domestic debt default in August 1998 - Latin America's is a slow-drip crisis. Each piece of bad news has provoked pessimism, followed by relief that things haven't turned out as badly as feared. But as the world begins to cheer Asia's rapid recovery, it doesn't seem to have noticed how bad things have become in Latin America.
Not since the dark days of the debt crisis in 1982 have the majority of Latin American countries simultaneously suffered negative growth. Argentina's economy shrank at an annualized rate of 3% in the first quarter of 1999 and is now moving into much deeper recession. Chile's GDP was 2.9% lower in the first half of 1999 than in the same period last year. Meanwhile Colombia, Venezuela and Ecuador will all suffer negative growth of 5% or more this year. The only two large Latin American economies growing this year are Peru, where growth has slowed sharply to 2.6% in the first half of 1999, and Mexico, buoyed by strong links with the US and a rising oil price, which achieved growth of 2.5% in the first half of the year compared with the same period in 1998. Brazil's GDP growth rate is hovering around zero.
This is an economic crisis on a par with Asia's recent troubles. The rate of GDP contraction in Thailand, Malaysia, Hong Kong and South Korea reached between 5% and 7% in 1998 before a sharp bounce back. The low point for the Philippines was just below 0%. Only Indonesia experienced a contraction of more than 10%. Singapore, Taiwan and China have continued to grow through Asia's crisis.
The big difference is that with the exception of Ecuador, banking systems in Latin America have not collapsed. But Latin America has been shut off from international credit to at least as great an extent as Asia. Whereas the better Asian credits can tap pockets of demand in Europe and can count on some support from Japan, appetite for Latin American risk has vanished in the market which matters most to the continent, the United States. When US investors have felt bullish this year they have continued to pile into domestic equities. When they have felt bearish, any emerging-market security has been marked for sale, if a bid could be found.
Latin American governments can borrow in the international markets only at spreads several percentage points higher than one or two years ago. Instead, they are increasingly tapping local sources of finance. That is crowding non-sovereign borrowers out of domestic markets and starving industry of credit. Brazil, the world's eighth largest economy, cannot get maturities of more than three years in any market. Company defaults have risen alarmingly. Raising equity or corporate bonds is nigh impossible for Latin American companies.
If the latest bout of uncertainty was caused by comments made by a possible future president of Argentina, the crisis was prompted by the cavalier pronouncements of a former South American head of state. Itamar Franco, who was president of Brazil for a short while in the early 1990s, became governor of the state of Minas Gerais in January and almost immediately announced that the state would not be paying back its debt to the central government. This was enough to shatter the fragile confidence in Brazil's currency, the real. After months of holding the line, the central bank abandoned its peg and let the currency float. Share prices fell, bond yields increased and the value of Brazil's mostly dollar-denominated debt soared.
Ecuador, one of the continent's smaller economies, was the next to be hit in late February. It too was forced to devalue its currency. There was a run on the banks and 10, including some of the country's biggest, have since collapsed.
Then, in the second quarter of 1999 things became a little better. In Brazil the currency stabilized and, with economic activity subdued, there was no quick return to inflation. Argentina's authorities squarely rejected the suggestion that its currency could go the same way as Brazil's: its constitutional commitment to parity with the dollar seems safe. Latin American borrowers began to come back into the market. Argentina issued a 10-year $1 billion bond in late March and this was quickly followed by a rush of issues from smaller sovereign borrowers. In late April, the Brazilian authorities were able to attract $3 billion in the international capital markets by issuing $2 billion of new five-year bonds and exchanging $1 billion-worth of Brady bonds.
But within a couple of months events had started to worsen again. Colombia was forced into an effective devaluation of its currency in June. And as economic data became available for the first months of the year it was becoming clear that most of the continent was moving into deep recession.