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A new risk of default

Mexico, Brazil and Argentina have adhered to their structural reform programmes despite the side-effects ­ on growth and employment ­ in order to maintain investor confidence. But, David Pilling argues, high financing requirements could still lead them into difficulties. A sudden outflow of capital might result in default

As the tequila crisis triggered by Mexico's devaluation of December 1994 begins to recede into the past, Latin America is breathing more easily. So are most holders of Latin sovereign debt, who not long ago had seen Mexico come to the brink of default and had begun to question the sustainability of economic models in Argentina and Brazil.

Mexico, thanks to a $50 billion international rescue package spearheaded by the US, did not default. Neither did Argentina which, with the help of a $7 billion IMF-led cash injection, stuck to its economic guns. Brazil, too, did not waiver and has continued to consolidate gains in its battle against inflation while pushing steadily ahead with economic reforms.

Last year's crisis "tested the resilience of the region, but it withstood it without defaulting", says Jerome Booth, head of research at ANZ Bank in London. Governments did not swerve in their policy programmes, but went so far as to consolidate reforms in the face of crisis. Argentina even pushed through swingeing spending cuts and tax increases only weeks before presidential elections in May 1995.

Having seen Latin countries pass their test of fire, "we have to come to the conclusion that the default risk is now much lower," says Booth.

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