The New York Times
September 1, 1998

          Latin America Is Buffeted, but Seems Stronger
      Than in '94

          By JULIA PRESTON

                MEXICO CITY -- The demons of financial crisis are haunting Latin
                America again, unleashed by tumult in Russia, Japan and now the
          United States. Markets and currencies across the continent are sinking as
          panicky investors retreat to the safe haven of U.S. treasury bonds and

          Most of the major Latin economies are far better fortified to withstand the
          external battering than they were four years ago, when a disastrous
          devaluation in Mexico engulfed several Latin American economies into
          what economists, investors and politicians called the tequila effect. Since
          then Mexico and Brazil have taken sober measures to build foreign
          reserves and control inflation while Argentina and Chile persevered in
          tough programs already in place.

          Among the big players, only Venezuela failed to buckle down to austerity
          and now is paying the price in a full-blown emergency, with reserves
          dropping, short-term bank interest rates soaring to 120 percent and the
          stock market off 37 percent this month.

          Since most of the underlying economies are solid, the market turmoil
          might have a milder effect in Latin America than alarming appearances at
          the moment augur, economists and analysts said. But they cautioned that if
          markets outside the region continue to dive for long, or if investors flee the
          emerging markets en masse without regard to the strengths of individual
          countries, the outcome could be devastating.

          And if the U.S. market slide results in a sluggish U.S. economy, the
          damage will be even greater in Latin America, which sends most of its
          exports to the United States.

          As if to prove the point, on a day when the Dow Jones Industrial Average
          plummeted 512.61 points, or 6.37 percent, the Mexican stock market
          was down 5.14 percent. Mexico canceled a regular Monday auction of
          government treasury bills, known as CETEs, saying that "the offers
          received were not consistent with the macroeconomic situation of the
          country." It was the first time the auction was canceled since the grim days
          in the wake of the 1994 devaluation.

          The leading index of Brazilian stocks was off by 4.06 percent. Even the
          stock market in stolid Chile was off 3.01 per cent. Venezuela,
          surprisingly, was not hit, with its stock market in a modest rally of .18

          "Latin America is the good neighbor in a bad neighborhood," said Riordan
          Roett, director of the Western Hemisphere program at Johns Hopkins
          University in Washington, D.C. The region's countries "should not be
          affected, but they will be," he said.

          Alejandro Hernandez, a top economist at the Instituto Tecnologico
          Autonomo de Mexico, said, "Nobody has any really perfect defenses.
          This is the challenge of the smaller economies in a globalized world."

          In 1994, the region's problems were largely self-inflicted, and the United
          States, then growing robustly, and the International Monetary Fund were
          ready to step in with loans to help. Now Latin America is paying for
          mistakes made in Moscow and Tokyo, which rattled the markets and also
          sent prices for many key Latin commodities, like wheat and oil, to their
          lowest real rates in decades. And neither the United States nor the
          cash-strapped IMF can do much to rescue any country here.

          Mexico has done the most to clean up since 1994. Although the peso has
          slipped (it recovered slightly Monday to 10.02 cents, up .4 percent), most
          analysts believe it is fairly valued. Oil revenues make up 37 percent of the
          government's income, and President Ernesto Zedillo responded quickly to
          the drop in petroleum prices by slashing the federal budget three times,
          maintaining a modest deficit of about 1.25 per cent of the gross domestic

          Growth, which boomed in the first half of the year, is expected to slow
          through next year but remain healthy. The government is still promising
          growth of more than 5 per cent this year, but economists have revised
          their estimates down to 4 percent to a low of 2.3 percent, by
          Bursametrica Management in Mexico City.

          Interest rates climbed Monday to 38 percent for the overnight Cete. But
          after the drubbing that Mexican banks and indebted citizens took in 1994,
          far fewer loans are out there now. Foreign reserves have remained at
          record highs, with the influx of long-term investment in factories and
          infrastructure, which now accounts for about 70 percent of all foreign
          investment, helping to keep them there.

          Mexico's big weak spot is its ailing banking system. The national
          Congress, which will open a new session next week, remains angrily
          divided about how to pay for an multibillion dollar bank bailout. On
          Sunday, 3 million Mexicans turned out to vote against the government's
          proposal in a symbolic referendum organized by an opposition party, the
          Party of the Democratic Revolution.

          "This is very far from classifying as a crisis," said Jonathan Heath, an
          economist with LatinSource Mexico. "There is a lot of noise, a
          psychological crisis. But while the financial markets are reflecting what is
          happening in the rest of the world, the real economy continues to grow."

          Elsewhere, political factors are central. At the outset of the Asian financial
          crisis last October, Brazil President Fernando Henrique Cardoso
          marshaled through a package of reforms that doubled interest rates and
          imposed steep tax increases and spending cuts. But the fiscal deficit
          remains at nearly 7 percent of the economy. The Brazilian currency, called
          the real, is traded within a fixed band and is said by analysts to be
          overvalued by at least 10 percent. The Central Bank said that $7.7 billion
          left the country in the four weeks before Aug. 28.

          But Cardoso appears to determined to forestall any devaluation and even
          cut interest rates, at least until after the Oct. 4 elections. Polls show that
          he is likely to win a second four-year term easily in the first round. Brazil
          has huge foreign reserves of about $72 billion, and several valuable
          government properties to sell in a crunch.

          "We are going to face this crisis, as always, calmly without any new
          package, without any scares," Cardoso told reporters in a brief
          appearance Friday.

          Venezuela faces the most severe problems, analysts say, primarily
          because neither of the two most prominent candidates in presidential
          elections in December hold much promise of bringing tough solutions to a
          wayward economy. The front-runner, Hugo Chavez, 44, is running on a
          populist platform of broadside repudiation of the country's political elite
          for years of economic instability.

          Another contender is a former Miss Universe, Irene Saez, who is 36 and
          has no experience in economics.

          Venezuela has done little to reduce its dependence on petroleum, which
          accounts for three-quarters of all exports.

          In the longer term, economists are worried that investors' confidence will
          be so shattered by a new round of losses in the emerging markets that
          Latin countries will have trouble returning to the international markets for
          help to pay their debts next year.

          "It may be a long time before investors can differentiate and say that Brazil
          is different from Russia. We could be in for a period when nobody is
          willing to touch the emerging markets," said Sylvia Maxfield, an emerging
          markets strategist at Lehman Brothers.