The New York Times
October 14, 2001

Economic Pain Spreads From U.S. Across Latin America


BUENOS AIRES, Oct. 13 Economies throughout Latin America have stumbled badly since the terrorist attacks on New York and the Pentagon,
stirring fears of a long-term recession.

From Mexico to Chile, country after country has suffered an abrupt downturn. Currencies have plummeted as the jolt to the world economy has cut prices of
basic goods like oil, copper, zinc, steel and foodstuffs. Vital capital inflows have withered, sending Latin stock and bond markets plunging, and driving up
interest rates.

That in turn stalls business expansion and consumer spending.

In assessing the damage, economists say the severity of the slowdown will depend on the course of the United States economy, which is influenced by
unknowns like the duration of the fighting in Afghanistan and whether terrorists strike again.

Already the slowing Latin economy has led to corporate layoffs and cutbacks in government jobs and social programs, and it has provoked protectionist
policies that have worsened regional trade tensions.

"We must prepare for the most difficult scenario," the Argentine economy minister, Domingo Cavallo, said recently. "What is approaching is a deceleration of
the United States and European economies in the context of a war against terrorism. Investment will increase in areas like security, while consumption, tourism
and other activities that generate economic movement will fall."

The vital tourism industry has dried up in Mexico, Central America and the Caribbean, putting new pressure on foreign reserves and increasing unemployment.
Multinational companies, too, have shelved planned investments in the Peruvian mining and Brazilian telecommunications industries.

"Latin America is entering one of the most difficult periods it has faced in many decades," Enrique Iglesias, president of the Inter-American Development
Bank, said this week.

So far, any backlash against the free-market reforms that swept the region in the 1990's has been muted. But politics here are tumultuous, and there is the
potential for the political winds to change quickly. This may be more likely because poverty and high unemployment remain severe Latin American problems.

The proportion of people living in poverty decreased modestly in Latin America in the 1990's, according to a new report by the United Nations Economic
Commission for Latin America and the Caribbean, although progress was uneven. Meaningful social programs were begun in Colombia, Guatemala, Chile,
Peru and the Dominican Republic. But unemployment actually increased in Brazil, Colombia and Argentina, and the income gap between the rich and poor
grew in most of the region.

Of the 500 million people in Latin America, 89 million live in extreme poverty, according to the United Nations. That number is bound to grow in a recession.

Already, there are signs of a political shift. A backlash against the free- market economic policies of Argentina's president, Fernando de la Rúa, is expected in
Sunday's congressional elections, for instance, as the governing alliance is expected to go down to a decisive defeat. A downturn in Colombian manufacturing
does not bode well for a government struggling against two guerrilla insurgencies.

In Mexico, support for President Vicente Fox's efforts to undo seven decades of one-party rule continues to slip as his pledges to create jobs fall by the
wayside. Because of geography and the North American free trade agreement, Mexico is intricately linked to the United States economy.

Most of Latin America's economies had been slowing since the beginning of the year in tandem with the American economy, after generally good if selective
advances throughout the 1990's, an era of deregulation and privatization. But as the economies opened up, they also became more vulnerable to troubles
imported from around the world.

Regional troubles this year are tied to the slowdown in the United States and to worries that Argentina may fall into a traumatic debt default and devaluation,
which would scare away more investment and could cause serious repercussions in Brazil. The events of Sept. 11 have intensified threats to the economies.

In a report this week, Goldman Sachs pulled back from its previous prediction that Latin America's regional economy would grow this year at a modest rate
of 1.3 percent, adding, "we believe that real G.D.P. growth will struggle to remain in positive territory."

The direct impact of the terror attacks has already been felt in Mexico, which sends 85 percent of its exports to the United States and relies on American
travelers to drive a tourism industry that generates about $9 billion annually and employs up to 5 million people.

Aeroméxico and Mexicana, the country's two leading airlines, have announced layoffs of several thousand workers as a result of a sharp decline in traffic at
home and abroad. Hotels and travel agents are reporting mass cancellations.

A considerable portion of the $30 billion of revenue that Mexico gets from oil in a year may also be in jeopardy; it provides about a third of government
spending. Oil prices could reverse if a war disrupts Middle East supplies, helping Mexico as well as Venezuela, Colombia and Ecuador. So far, however, oil
prices have eased as the prospect of a deepening world recession has increased.

"In previous U.S. economic downturns, the impact took months to reach us but this time there has been an instantaneous impact," said Noé Arón Fuentes,
chairman of the economics department at the Colegio de la Frontera Norte in Tijuana. "We now fear a deeper and longer U.S. recession, and that is going to
mean higher unemployment for Mexico."

Even countries with limited trade with the United States, notably Argentina, have been put at greater risk as international investment flows have shifted
increasingly to cash, United States government bonds and gold, although stocks have rebounded a bit in recent days. In its 40th month of a deepening
recession, cutbacks in consumer spending forced car production down by 47 percent and government tax collection by 14 percent in September, compared
to the same month last year. With commodity prices low, interest rates rising, its currency tied to the strong dollar, and a big drop-off in investment flows,
Argentina has few resources to handle the emergency.

Its fiscal shortfall has forced the government to scramble to make more budget cuts, after already slashing salaries and pensions in recent months, stoking
labor unrest. This week Standard & Poor's downgraded Argentina's credit-worthiness for the fifth time this year, and with United States Treasury officials
now busy with more pressing economic concerns related to the terrorist attacks, they have been diverted away from their efforts to engineer an Argentine
bond swap to relieve the government's immediate and medium-term debt burden.

With the deepening slowdown following the attacks, some economists have predicted that the $8 billion International Monetary Fund emergency package in
August will probably only delay a default of Argentina's $130 billion central government debt and $20 billion more in provincial government debt until early
next year.

Mounting debt pressures and falling investor confidence could force the country to drop its decade-old currency peg to the dollar and devalue the peso a
move that could have a devastating impact on a private sector with more than $20 billion in debts dominated in dollars and push up an unemployment rate that
is already over 16 percent.

Mounting skittishness over Argentina's finances has further eroded investor confidence in Brazil, whose currency was already declining in value at a disturbing
rate before the terrorist attacks. After the attacks, companies, individuals and speculators sold the currency, reals, and bought dollars at a quickening rate,
effectively producing a devaluation of more than 8 percent.

Brazil's weak currency, economists say, increases exports but adds to the government's considerable debt. Economists also say rising interest rates in recent
months could push Brazil into a recession while also increasing the cost to the government of servicing the debt. Since the September attacks, Lloyds Bank
has trimmed its economic growth for the fourth quarter of the year to zero from 2 percent.

"Before the attacks, the central bank was poised to lower interest rates because we had some signs that Brazil was facing a serious slowdown," said Odair
Abate, chief economist at Lloyds Bank in São Paulo. But after the attacks, he said, a sharp drop in the currency's value took away the central bank's options
to cut interest rates and spur growth.