Dave Eberhart, NewsMax.com
Thursday, Aug. 15, 2002

Just last month, U.S. Treasury Secretary Paul O’Neill was humming a few bars from a wholly different number: "I wonder if loans to Latin American countries will end up in Swiss bank accounts.” That unpopular ditty provoked outrage and diplomatic protest by Brazil’s foreign minister.

With fresh writing on the wall that Latin America is indeed on the precipice of regional crisis, O’Neil has changed his tune. He now pledges the support of Washington to help Argentina emerge from the financial chaos that threatens to poison other fragile Latin American economies.

Uruguay, caught up with Brazil and the rest of Latin America in Argentina’s economic fallout, has recently seen food riots bloody its streets. Under siege, the country closed its banks to stem capital flight and the fall of its currency.

Many Uruguayan banks depend on Argentine banks, and Uruguayan customers, fearful of a freeze on term deposits like that in Argentina, have been running to withdraw their loot. In one recent month alone, $1.387 billion fled the country, or 12.44 percent of total deposits in the entire banking system.

Meanwhile, its name on everyone’s dance card, Argentina remains caught between a rock and a hard place. The IMF (and the U.S.) won’t samba in with any meaningful aid before the ailing country cleans up its financial house, but if funds don’t arrive soon, its already abysmal standing in the world financial community will only tumble further.

Diego Ramiro Guelar, Argentina’s ambassador to Washington, has been lobbying hard to get the IMF to conclude a palatable agreement and roll over its lending to the country. "Since February I have been trying to tell the [U.S.] administration they were facing a regional crisis, but their view was there was no contagion. Now, the scenario is different.”

Last year, deadly rioting followed the application of the strict banking restrictions favored by the IMF. In addition to toppling Argentina’s government more than once, the political crisis spawned by the restrictions was only a precursor to the beleaguered country’s catastrophic default on $141 billion of debt.

In late June, Argentina suffered another flare-up in Buenos Aires, where a protest by unemployed Argentines demanding urgent social assistance was forcibly put down resulting in two dead, 17 injured and 160 arrested.

The Spreading ‘Contagion’

The $30 billion that IMF pledge to ailing giant Brazil is on top of $15 billion that the country received a year ago, also earmarked to help prevent its economy (the largest in South America) from being infected by what has been styled by commentators as financial "contagion” from Argentina. Most of that $15 billion loan has already been drawn down.

According to London’s Financial Times: "Investors got burned with Argentina and now they distrust Brazil. They think that, although the risk may be small, it is better to get out. The Argentine crisis created the conditions for Brazil to fall into this situation. It is a type of contagion over the long term, a rejection of market reforms affecting the confidence of investors.”

Foreign capital has been flying from the Sao Paulo stock exchange, while the "country-risk” premium on Brazilian debt in international markets has climbed from 700 basis points to more than 1,500 basis points in only six months. Additionally, foreign investment has dwindled from $33 billion in 2000 to $23 billion in 2001, with authorities expecting an inflow this year of only $18 billion.

Leftist Candidates Worsen the Problem

Argentina’s catalyst effect aside, Brazil’s instability is also being fueled by two leftist candidates who have built strong leads in the race for the presidency, fanning concerns among investors and foreign bankers that the country may abandon its free-market, anti-inflation policies. In the last few weeks, there has been a precipitous fall in the country’s bonds and currency, coupled with a tide of selling.

The Argentine crisis has also spilled over hard on little Paraguay, a partner in the Common Market of the South. On July 15, Paraguay’s president declared a state of emergency after protesters angry over economic policies clashed with police.

Chile, however, has weathered the Argentine storm with only minor casualties. There has been a glancing effect on investments and a modest devaluation of the peso due to the deterioration of the image of the region.

Unlike unfortunate Uruguay, Chile’s banks are not directly vulnerable to the Argentine crisis. But perhaps serving as the best insulation from the crisis raging around it is the country’s reputation for economic stability.

Trading Blocs Affected

Latin American trading blocs have not been immune from the regional economic strife. Mercosur, the Common Market of the South and until recently the third-largest trading bloc in the world, has been bludgeoned by the economic strife rippling through the region.

Dropping by nearly 45 percent in the last year, trade among Argentina, Brazil, Paraguay and Uruguay has lost the lion share of the gains and momentum enjoyed by the bloc since Mercosur kicked off in 1994. Monthly trade figures match the levels of 1991.

Not surprisingly, Argentina leads the pack with its imports shrinking by 63 percent in the first six months of the year. Meanwhile, even exports, attractive because of the currency devaluation, have dipped 7 percent.

Uruguay’s exports have shrunk 70 percent, the impact aggravated by a fall in tourism from Argentina.

Even resilient Chile has felt the pinch, its exports to Argentina falling 61.5 percent during the first quarter. Adding to the mix, the country’s $3.2 billion foreign investment in Argentina has shrunk by 12 percent in value and is forecast to net zero-point-zip earnings this year.

The dramatic trade slump has also hurt Mexico, as cross-border trade advantages dwindle. More than 300 foreign assembly plants have closed in NAFTA country.

And the Latin beat goes on: violent strikes in Ecuador, rioting in Paraguay, bloody protests in Peru, forcing the country's privatization process to a halt – and the burning of an effigy of Paul O'Neill on the streets of Argentina.

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