Latin American Economies Back from the Brink?

Weekly News Update on the Americas, Issue #450, 13 September 1998

On Sept. 10 Latin American markets suffered their third consecutive Black Thursday. In Brazil, the Bovespa stock index of Sao Paulo plunged by 15.82%; the Merval in Buenos Aires, Argentina, was down by 13.32%; Mexico's Bolsa Mexicana de Valores fell 9.82%; the Santiago de Chile exchange was down by 7.38%. For the first time in history the Sao Paulo exchange was forced to halt trading twice in one day. Standard & Poor's lowered its country rating on Brazil to negative, and by 6:30 pm $1.7 billion in foreign reserves had reportedly left Brazil in less than one day. Brazil has lost about $17 billion in reserves over the past month. Brazil has half of South America's population and the world's ninth largest economy; the New York Times describes it as the country most capable of ushering in a Latin version of the turbulence that has roiled Asia and Russia.

In Mexico the peso fell to 10.35 pesos to the US dollar, down by about 35% since the beginning of the year. The fall came despite the Banco de Mexico's effort to shore the currency up by selling $478 million in foreign currency, the first direct intervention by the central bank for the peso since December 1995. [La Jornada (Mexico) 9/11/98; New York Times 9/11/98; El Diario-La Prensa 9/13/98 from AFP]

The government of Brazilian president Henrique Fernando Cardoso responded to the crisis on the evening of Sept. 10 by raising interest rates from 29.75% to 49.75%. Less than two days before, the rates had been increased from about 19%. The drastic measure was meant to attract investment with high interest rates-- although at the risk of causing a recession by cutting off bank loans. The government also imposed new austerity measures, announcing a 10% budget cut ($3.9 billion) on Sept. 9, mostly from the transportation and environment agencies. [ED-LP 9/13/98 from AFP; LJ 9/12/98 from news agencies; Washington Post 9/12/98]

The gamble seemed to pay off: the Sao Paulo exchange jumped up by 13.39% on Sept. 11. The rest of Latin America followed, with the Buenos Aires stock market rising by 6.78%, Mexico's by 2.16% and Peru's by 1.46%. During the day Michel Camdessus, managing director of the International Monetary Fund (IMF), helped Latin American markets by issuing a statement saying that the IMF already has financial arrangements with several countries in Latin America, and according to its mandate, it stands ready to strengthen its financial support and broaden it to other countries if necessary. [LJ 9/12/98; WP 9/12/98] The Rio Group--a group of 10 of the most powerful Latin American countries--had concluded a summit in Panama City on Sept. 5 by suggesting that institutions like the IMF might have to intervene with funds. Speaking for the group, Mexican president Ernesto Zedillo Ponce de Leon called for measures to avoid at all costs a global recession. [LJ 9/6/98]