BUENOS AIRES, Argentina (CNN) -- Brazil's financial turmoil has
raised concerns that economies from Argentina to Venezuela could be
dragged into a recession this year.
The decision by Brazil, Latin America's largest economy, to
devalue its currency by about 8 percent sent shudders throughout the
region and reignited fears that the global economic crisis, which broke
out in Thailand in 1997, is far from over.
Analysts raised the possibility Thursday that other countries would be
to slice the value of their currencies, that their economies would contract and
that jittery investors would pull money out of the region.
"Brazil controls whether things go well or bad," said Argentine economist
"If this gets out of control all of Latin America could suffer," said Sung
Sohn, chief economist at Wells Fargo and Co. in Minneapolis. "When Brazil
sneezes, the rest of Latin America catches a cold."
No country worries more about Brazil's economic ills than its southern
Nearly 30 percent of Argentine exports go to its giant neighbor. Cars made
in Argentina are sent to Brazil. Many of the dairy products coming from the
vast Argentine Pampas go north to Brazil. So do oil products.
A continued drop in Brazil's currency would make those products more
expensive for the Brazilian consumer and dampen demand.
Regional economies intertwined
The two countries' economies are intertwined through the Mercosur trading
bloc, which also includes Paraguay and Uruguay. As an indication of
Argentina's link to Brazil, Argentine stocks tumbled 10 percent Wednesday
following the announcement that the Brazilian real was devalued. It was the
biggest drop in the region and stocks continued to falter on Thursday,
closing down 4 percent.
The last time that Latin America underwent a regional economic crisis,
following the collapse of the Mexican peso in late 1994 and early 1995,
Argentina's economy contracted 4.6 percent as investors ran for cover.
But since then, the government of Carlos Menem has introduced a string
economic reforms, making the economy much better prepared to cope with
Its banking system -- the weakest link in 1995 -- is transformed and foreign
currency reserves are at record highs thanks to its efforts. Meanwhile,
investor confidence has been boosted sharply by the government's policies,
including a budget deficit of just over 1 percent of gross domestic product,
compared with 7.45 percent in Brazil.
While other Latin American countries are less closely linked to Brazil,
consequences of persisting economic woes there have many worried.
A continued devaluation of Brazil's currency would threaten the stability
Venezuela's currency, the bolivar, at a time when the economy is reeling
from the low price of petroleum, its main export. Many analysts already
believe the bolivar is overvalued and in need of adjustment, but any hint of
devaluation would cause investors to head for more stable areas.
Mexico better prepared to weather looming storm
Should foreign investors continue to withdraw their money from Brazil,
would also dampen Mexico's economic health. Many investors hold
Brazilian and Mexican stocks in the same portfolio.
Bruce Steinberg, a chief economist at Merrill Lynch in New York, said
Mexico was better prepared than other countries to weather any looming
"Mexico might squeak by with weak growth because of its close trade links
to the U.S. but that will depend on how the contagion effects play out," he
Peru has already slipped into a recession, and should the troubles in Brazil
drag out, it would exacerbate an already severe debt crunch.
"We are anxiously waiting to see how the exchange rate will react. Who
doesn't owe money in dollars here?" said Peruvian journalist Igancio
The Associated Press contributed to this report.