Over the past few weeks, some silly ideas have circulated on the impact of
the financial crisis on Latin America. The
most dangerous was that Latin America would be
largely impervious to a debacle that was, as Brazilian President Luiz Inácio
Lula da Silva imprudently phrased it, "Bush's crisis." Leaders
ranging from Mexico's Felipe Calderón on the center-right to Fidel Castro and
Hugo Chávez on the extreme left all claimed, for different reasons, that
orthodox macroeconomic policies, recent growth, solid banking systems, the high
price of commodities (oil, soybeans, copper, iron, coal) and tighter market
regulation and supervision would help spare the Latin economies from the woes
of their partners across the Rio Grande, the Atlantic and the Pacific. Or, in
their more excessive moments, Castro, Chávez and a few others (on occasion, Argentina's
Cristina Fernández de Kirchner) gloated over the demise (finally) of the
capitalist system, from which socialist countries like theirs would emerge in
better shape than others.
Well, the Brazilian real has dropped 30 percent from its August high and the
São Paulo stock
exchange has fallen 45 percent since the end of June. The Mexican peso has
fallen 30 percent against the dollar since mid-September, and the local stock
exchange has collapsed. Commodity prices, which through direct ownership (Mexico, Venezuela,
Ecuador, Colombia, Chile)
or taxation (Argentina, Bolivia)
provide huge shares of government revenues, have dropped sharply. Growth forecasts
for the last quarter of 2008, and mainly for next year, have been cut
dramatically. So much for the idea of Latin immunity from contagion.
It was always naive, even deceitful, for these experts and rulers to
maintain that the region would be cushioned from the effects of the crisis.
While many Latin banks do not depend as much on foreign credit and thus are
less vulnerable to the credit crunch than richer nations, suppliers' credits
are key for exports, foreign loans are crucial for infrastructure projects and
foreign investment remains important for many economies (Mexico, Brazil,
Colombia, Peru). Since much of the impressive recent growth has been commodity
driven, the fall in prices can be devastating for countries like Peru, Venezuela,
Ecuador and Argentina.
which has the region's most diversified and sophisticated export base, is also
an enormous producer of food exports and minerals and is being shaken by
falling-hard currency earnings. The country that is perhaps the least sensitive
to commodity prices--Mexico, because of the large volume of its manufacturing
sales abroad--is the most sensitive to the swings and lurches of the U.S.
economy, since 90 percent of its exports and tourism, and 100 percent of its
remittances, are American-based.
Another unnoticed vulnerability is that, as Latin economies globalized over
the past two decades, the number of local companies listed in New York rose rapidly. Thirty-eight
Brazilian companies are quoted on Wall Street; 20 Mexican ones are; 15 Chilean;
and a growing number of Peruvian, Colombian and Argentine corporations are too.
They all represent large proportions of the market capitalization in their own
home exchanges (Telmex alone accounts for nearly 50 percent of the Mexican
Bolsa's trading), and they all track the Dow with great fidelity.
If the Dow plunges, their value follows in New York,
the fall spreads to São Paulo, and so on, and
local investors flee the local exchanges and buy what the rich in Latin America have always bought: dollars. The currency
plummets, central banks raise interest rates to retain money at home, and a
domestic debt bubble bursts: mortgages, automobile loans and credit-card
balances become unsustainable. All of this is beginning to happen, and will
probably get worse before it improves.
This is a stark reminder of how contagion works. One of the other silly
ideas about the fallout was that in the past, crises began in Latin America and
spread north, making this year a very new scenario. Not so. It was Paul
Volcker's 1980 decision to raise interest rates that led, two years on, to the
Latin debt crisis, which never really affected the creditor countries. The 1987
stock-market collapse began on Wall Street, spread to Mexico and throughout Latin America, but never
returned; finally, the Mexican collapse of 1994–95, as well as the Brazilian
devaluation of 1997, occurred during one of the longest economic booms in
history. All crises that begin in the rich countries spread south; those that
originate in the south rarely travel north.
Some countries will emerge from the current crisis better than others. Mexico, Chile,
Brazil and Uruguay should manage just fine, with only
bruises and scrapes; others will weather the storm, though suffering greater
harm (Colombia, Peru). But
others will incur severe damage: Venezuela,
Bolivia, Ecuador, Central America and the Caribbean. With too much delay, all of their leaders have
finally acknowledged what everybody knew: no crisis with this impact in the United States and Europe could avoid ravaging Latin America as well. Now all these leaders have to do
is decide how to protect their societies, and how to pick up the pieces when
the time comes.