Latin Countries Hope to Avoid Radical Market Measures
By SAM DILLON
MEXICO CITY -- The recent panic in world markets has
weakened Latin American currencies and drastically reduced the
wealth of many Latin corporations, raising prospects that governments in
the region may be forced to take Draconian measures to contain the
in Brazil, Mexico and Argentina and other nations
have allowed interest rates to rise, spent billions of dollars of reserves to
support their currencies, and tinkered with other limited steps. But,
perhaps hoping that market calm will eventually prevail, they have avoided
more drastic steps like aggressively squeezing cash out of circulation,
"The Latin countries
are using their second-stage defenses, hoping that
these external shocks won't last very long," said Luis R. Luis, a managing
director at Scudder Kemper Investments in Boston. "They want to avoid
having to impose really Draconian monetary policies. But if this continues,
they're really going to have to jack up the interest rates."
Most Latin American
markets got a breather Friday after a week of
panicked trading that saw foreign investors flee from the region and local
traders cash out of equities to buy dollars.
which have fallen by more than half in dollar terms since
the beginning of the year, rose 3.22 percent, with confidence bolstered in
part by a more modest rise in Brazil's larger stock market.
index rose nearly 1 percent; the Chilean and
Peruvian exchanges were off only slightly. Venezuela, the sick man of the
region, was the exception -- its stock index plummeted 4.52 percent.
But gloom among
investors and business executives across Latin America
continued to deepen. Fears continue that the collapse of the Russian ruble
could play out again here, either with a devaluation of the Venezuelan
bolivar or, in what would be far worse, the Brazilian real.
Adding to the
uncertainty was a belief that the International Monetary
Fund is short of cash and sitting on its hands, even though several Latin
countries are floundering. The fund has invited Latin American finance
ministers to meet next Thursday in Washington to discuss joint responses,
and Finance Minister Pedro Malan of Brazil and Economy Minister
Roque Fernandez of Argentina have said they will attend. Mexico's
treasury secretary, Jose Angel Gurria, and several other Latin ministers
have not yet announced plans.
But because the
IMF, after financing rescue packages for Asian nations
and Russia, has less than $10 billion available for future bailouts, its call
for a meeting has aroused little hope.
are starting to criticize what they see as a listless reaction
to the financial chaos in Latin America by the Clinton administration, too.
"The U.S. is
keeping monetary policy tight enough to slow our economy
even though most developing economies sink," said David Malpass, chief
international economist at Bear, Stearns. "I'm still hopeful that the U.S.
will become more engaged, to calm things down, and allow Latin America
Since the Asian
crisis began last year, international investors have become
increasingly leery of all emerging markets. And last week's financial
collapse in Russia has led to a truly hemorrhagic flight of capital out Latin
In Caracas, Venezuela,
where investors have been spooked by the
similarities between conditions in Russian and Venezuela's oil-dependent
and ill-managed economy, the stock market is off 66 percent for the year.
The Mexican bolsa is down 40 percent, and if losses from the declining
peso are taken into account, Mexico's markets are down 51 percent.
Brazil's market is 34 percent lower, Argentina's 47 percent and Chile's 35
the three largest Latin economies have confronted the crisis
with relatively modest initial tactics, apparently hesitating before taking
more painful moves, analysts said.
In Mexico, where
the currency floats freely, the peso has dropped by 8.9
percent since the ruble devaluation, settling here at 10.020 to the dollar
and in New York at 10.005. Authorities have attempted to slow the
peso's decline by auctioning dollars, $200 million at a time, several times
since the crisis began.
The Banco de
Mexico has also removed increasing amounts of currency
from circulation, as a way of indirectly raising interest rates. On
Wednesday, the central bank increased the reserve requirements for
commercial banks, a more forceful way of removing cash from the
economy. In response, interest rates have jumped from 22.0 to 27.2
percent for the 28-day Cetes notes which serve as a reference.
rates are far below the 50 percent-plus levels they reached
in the wake of the 1994 peso devaluation, when businesses were
strangled and the economy plunged into a two-year recession.
In Brazil, where
the real trades within a fixed band and is under assault by
speculators who consider it overvalued by more than 10 percent,
authorities have also been defending the currency. But there, too, they
have so far acted with less vigor than during, for instance, the country's
last crisis, a speculative attack on the real last October.
As in October,
Brazilian authorities have freely sold off foreign reserves to
defend the real. So far this month, economists estimate that some $8.5
billion of the country's 70 billion reserves have been sold to prop up the
real. And the authorities have made it easier for Brazilians to borrow
But in contrast
with last fall, the central bank has not yet raised official
interest rates from their current 19.75 percent during the current crisis,
although offshore rates, set by commercial banks, have soared to 36
percent. Last fall, the authorities in Brasilia raised official interest rates
from 20 to 41 percent to defend the real.
The tactics in
Brasilia are being watched closely in Buenos Aires. "The
largest risk for Argentina is that the next victim could be Brazil," said Luis
Secco, an economist at the Estudio Broda consulting firm in Buenos
is freely convertible with the dollar, and the central bank
has $23.7 billion in reserves. So far, the Argentine authorities have made
no changes in policy to react to the crisis, Secco said. "Our authorities are
viewing this calmly," he said.
is true in Venezuela, where economists estimate that the
bolivar may be overvalued by at least 30 percent and the budget deficit
has balooned as oil revenues have plunged this year. Authorities have
made deep spending cuts, allowed interest rates to soar above 100
percent, and last week sold off nearly $500 million of the country's $14
billion in reserves. Nonetheless, fears of a devaluation are increasing.