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International Trade and Finance + Currency Latin America is undergoing a difficult period as its countries face significant economic, political and social challenges. Financial institutions operating in the region play a key role for Latin American countries seeking to rebuild their economies. Despite a slowdown in economic growth in Latin America in 1999, trade continued to develop while foreign direct investment saw only a small decline. The deceleration apparent was stronger in 1999, with GDP growth of only 1 %, according to the United Nations Economic Commission for Latin America and the Caribbean (ECLAC) and the World Bank. Santander Investment was 1. 5 % growth, while JP Morgan expected 0. 9 % growth in 1999. Brazil, by far the region's largest economy, encountered an outright recession, decreasing its economy by 1 %.
Venezuela also witnessed a contraction of 1. 5 %. Mexico and Argentina, the next largest economies, were expected to grow by 3 % and 2. 5 %. 1 According to a survey by the Santiago Chamber of Commerce in Chile, privatizations are expected to attract some $ 72 billion between the first quarter of 2000 and the end of 2001. At the present time, international investors are losing confidence in Brazil. It is motivated by the economic collapse in Argentina which threatens to hurt economic plans in several Latin American countries. The domino effect, once used to describe the spread of communism, now refers to the spread of international financial crises and describes emerging market economies. But the collapse of Argentina's financial system did not have a substantial impact on the other countries in the region.
But at the present time, the situation is changing. Doubts appear about neighbor economies. Brazil saw the fall of its currency. The cost of servicing its foreign debts has soared. In June, Uruguay abandoned its currency peg and floated its peso, which promptly sank by nearly 10 % in two days. Ecuador finds its own corruption problems more difficult to handle because of nervousness about the region.
as a whole. Francisco Gil Diaz opened a question of ordering public finances. Mr Gil Diaz likened Mexico to Argentina to tackle its public finances before the crisis erupted. (internet). Smaller economies, like Uruguay was forced to abandon its currency board, because the collapse of confidence in Argentina had made deposit-holders in Uruguay to switch their money into dollars. The large proportion of deposit-holder are Argentines. Such a situation created pressures on the central bank.
The banks reserves had fallen by around 40 %, which made the currency peg unsustainable. Smaller economies appear to be in recession with high unemployment rate. On the basis of the economy collapse, many Argentines blame the external factor for its failure. The resignation of Mario Blejer, the widely respected central-bank governor has further undermined hopes that a settlement with the IMF can be reached before repayments of loans from the Fund fall due over the coming months.
It is said that the main problem lies with Argentina's politicians. They remain reluctant, often for electoral reasons, to push through the reforms needed. Mr Blejer's resignation is attributed in part to the difficulties he found in working with the economy minister, Roberto Lavagna, and to the reluctance of the president, Eduardo Duhalde, to take tough and potentially unpopular decisions. (internet). The global economic upheavals that began with the meltdown of the Asian "tigers" and led to the collapse of Russia's economy have spread throughout Latin America, with devastating implications both for the population of the continent and for world capitalism. The beginning of the week saw a sudden surge on the stock markets of Sao Paulo, Buenos Aires, Mexico City and other Latin American capitals following statements by President Clinton that he would seek a coordinated response by the G- 7 governments to halt the slide of the region's economies, and most particularly that of its main growth engine, Brazil. 2 The Latin American events carry with them the threat of a "disintegration of the world capitalist system, " the multimillionaire financier George Soros testified before the House Banking Committee in Washington, DC on September 15.
Soros is heavily invested in the region. He is the largest real estate owner in Argentina and has extensive interests in Brazil and elsewhere. He told the committee that financial speculation threatened to bring down the economies of both countries. "Capital flight has already reached Brazil, " he said, "and if Brazil falls, Argentina will be in danger. " Capital flight, triggered by the events first in Asia and then the insolvency of Russia and Malaysia's closing of its financial markets to foreign investors, had provoked a "general economic panic" that is now ravaging Latin America, Soros said. He warned that this tendency is quickly turning into an "international credit blockade" against the so-called less-developed countries. 3 Soros pointed to the rise in interest rates to 50 percent in Brazil and 35 percent in Argentina, declaring that these figures were indicative of a "calamitous situation" that would, over the long term, end in an economic "collapse. " He warned that if the economic disease spreading throughout Latin America is not dealt with, it will inevitably spread to the "center of the system, " the United States itself, adding, "I don't think any bailout is possible. " The Brazilian government of President Fernando Henrique Cardoso hailed Clinton's statements about the necessity for a coordinated international response to the mounting Latin American crisis. The country's finance officials made it sound like a financial rescue package was all but in place. With barely three weeks to go until the country's presidential elections, the government is desperately trying to buy time, staving off a financial collapse and a social explosion.
What none of the officials promoting the prospects of a Clinton rescue package are discussing, of course, is the price that would be exacted from Brazil's workers and poor to pay for fresh credits. Standard and Poor's, Moody's and the major Wall Street investment firms have all made it clear that world finance capital is demanding a brutal escalation in the attacks on living standards and basic rights as a condition for any financial bailout. What remains of Brazil's social security system and labor laws would have to be scrapped. Whatever deficit-cutting measures are taken, however, will be quickly eaten up by increased debt costs resulting from the country's staggering interest rates. (2).
Brazil has seen a loss of more than $ 20 billion in international reserves over the past month and a half, $ 6 billion of it during last week alone. Even the brief spate of optimism following Clinton's remarks has only served to slightly slow the hemorrhaging capital flight, down to a level of approximately half a billion dollars a day. Increases in interest rates to 50 percent and a wave of devaluation will mean a huge reduction in consumer spending and ultimately a continent-wide depression that would wipe out earnings in a region that has been a central focus in US "emerging markets" investment. Referring to the new round of economic austerity programs and emergency measures taken to stabilize the region's economies, ECLAC declared, "the measures that have been adopted are much more stringent than would have been justified by conditions in each economy, as they have been put in place in response to foreign speculation.
As a result of the financial contagion, the Latin American countries will have to bear heavy costs, which have no domestic justification and are, thus, economically and socially inefficient. " In other words, measures imposed over the past two decades in the name of free market reform and economic liberalism have had the sole purpose of assuring foreign financial speculators the ability to realize their profits at the expense of the masses of Latin America's workers, peasants and middle class people. Though none of these structural adjustment programs have served to ward off financial catastrophe, it is now proposed that a new round of these austerity packages be introduced. In a survey of the region's economies released before the most recent surge in the crisis, ECLAC had already predicted that the Asian crisis would spell a slowdown in Latin American growth and mounting inflation, wiping out the extremely modest gains in jobs and wage levels registered over the course of 1997. 4 Colombia was forced to devalue its currency earlier this month after failing to halt panic selling on its stock market and the dumping of its currency with the imposition of 30 percent interest rates. Ecuador followed suit on September 15, imposing a 15 percent devaluation. President Jamil Manual, who came to power just a month ago pledging to take no measures that would undermine the living conditions of the country's population, also abolished energy subsidies, resulting in a 500 percent increase in natural gas prices, a tripling of electrical rates and a sharp increase in gasoline prices. He also pledged to lay off large numbers of public employees.
The measures sparked popular protests and the country's largest union federation, the Unitary Workers Front, or FUT, threatened to call a nationwide general strike, warning in a statement that the government is provoking a "social explosion. " Venezuela, meanwhile, has seen lending rates rise to 70 percent, reeling under the combined impact of the financial contagion spreading from Asia and Russia and the collapse in the price of oil, which accounts for 80 percent of the country's export earnings. Capital flight has intensified in the run-up to national elections in which Hugo Chavez, a former army lieutenant colonel who led an unsuccessful coup attempt six years ago, is the frontrunner. Chavez has campaigned on a populist platform pledging to freeze debt payments and slow down the privatization of state-owned enterprises. (1). Arguably, the international community could have taken a more sympathetic approach to Argentina's problems. But outside the country, there is relatively little support for the provision of greater financial assistance, and none among the IMF's principal paymasters, the G 7 rich countries.
American and European governments have repeatedly emphasised the importance of Argentina's confronting its economic problems and making the necessary reforms. Electoral politics lie behind many of Brazil's current difficulties. On June 21 st, the country's currency, the REAL, fell to its lowest level since its creation in 1994 and investors grew nervous about the outcome of the presidential elections in October. The risk premium on Brazilian government bonds over the interest rate paid on American treasury securities rose to levels last seen during the country's currency crisis in early 1999 (which ended with a sharp devaluation of the REAL). Investors are concerned by the country's public debt, now more than 55 % of GDP: interest payments account for 9 % of GDP. (Internet). With the resignation of President Fernando de la Rua, a former governor named Adolfo Rodriguez Saa is now leading the country, steering a populist course.
The Saa government will withhold payment on all foreign obligations for the next 90 days, including the $ 900 million debt owed to the International Monetary Fund in January. With the price of Argentine sovereign debt at about 30 cents per dollar of face value, it's a good bet that private Argentine debtors will be forced to default on foreign obligations as well. Brought to power after a political meltdown, Saa promises to create millions of public-sector jobs. He also claims Argentina will maintain peso parity with the dollar, but the government is rapidly increasing the money supply, issuing a new, nonconvertible currency, to circulate alongside convertible pesos and dollars and help add liquidity to the economy.
The number of pesos in circulation fell 30 % in 2001 as Argentines bought dollars, compelling cities and provinces to print IOUs to pay bills and salaries. 5 With the Saa government trying to buy popularity, the immediate prospect for Argentina seems to be hyperinflation and more political turmoil. When the Saa government is eventually forced to let the peso float against the dollar, Argentine banks and companies will be left bankrupt, and the savings of an entire country will disappear, a fate not unlike that facing the shareholders of Enron. Deflation, it seems, respects no national borders. For investors, the collapse in Argentina raises questions about other heavily indebted Latin giants such as Brazil and Mexico, as well as fragile states like Venezuela and Colombia. Brazil has already devalued its currency more than 50 % since 1999, but Mexico's overvalued peso, remarkably stable at about 9. 1 per dollar, stubbornly defies the negative economic trends that humbled Argentina.
Free-market advocates were delighted as U. S. Treasury Secretary Paul O'Neill contentedly sat back and watched Argentina implode. It's uncertain, though, whether Mexico will get the same "hands-off" treatment from the Bush Administration if investors pull the plug on the Mexican peso. (3). The cost of Argentina's default is political as well as financial. In 1930 a similar economic crisis in Argentina led to a military coup that ended 70 years of parliamentary government and led to a forced debt restructuring.
Argentina defaulted again after Mexico declared a debt moratorium in 1982. But in 1989, after 60 years of military misrule and socialist muddle, Argentina's inflation reached more than 10, 000 %, a political watershed that led to the decision to peg the peso to the dollar. The failure of this courageous gamble and the resurgence of anti-foreign Peronismo, the logical reaction to the IMF's austerity prescriptions, is a defeat for supporters of free-market democracy in Argentina and may presage the start of a cycle of political instability in Latin America. (1). A 3 to 5 percent long-term growth in GDP, within a low inflation environment, is a realistic expectation for the next decade. Volatility in emerging markets will most likely continue, but most countries in the region seem to be learning from each other and from each crisis.
It seems that the beauty contest for capturing international funds using the appropriate market policies has had the positive effect of making market policies more permanent across the region. Of course, the new conditions also reveal new risks in addition to the old ones. The low inflation environment has exposed the weaknesses of the financial sectors, and, although the problems are not as severe as in some Asian countries, more prudential regulation and better capitalization is urgently needed. It is clear that changes in sentiment can have an important impact on how investors judge risk in a particular economy. The disastrous collapse of Argentina, coupled with the government's failure to implement reforms acceptable to the international community, has made investors more risk-averse elsewhere. It is striking that the Argentine president has urged the IMF to provide more help for Brazil: Mr Duhalde can see that a full-blown crisis in Brazil won't help Argentina at all.
Unfortunately, his own failure to deliver only makes things worse for both countries. (2). Bibliography: Anderson, Harry, et al. Currency Influence on Trade. Newsweek, (7 November): 66 - 8, 1998. Finley, S. Latin International Trade.
New York: Van Nostrand Reinhold, 2000. Kamp, D. Wheels of Misfortune. Washington, D. C. : His, Christoph, 1999. Neff, Alan.
Latin Financial Crisis. Trade Law Quarterly 17, no. 3: 408, 2000. Valletta, J. The International Trade in Latin Countries. 6 th ed. Washington, D. C, 1998.
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Research essay sample on International Trade And Finance Currency
