Argentina's Woes Ripple Across Latin America

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Headline: Argentina's Woes Ripple Across Latin America; Stock index's 6.1% drop on interest rate worries is raising concerns in neighboring countries.

source: Los Angeles Times, 11 July 2001

URL: http://www.latimes.com/business/la-000056730jul11.story?coll=la%2Dheadlines%2Dbusiness

Stocks in Argentina slid to their lowest level since 1999 on Tuesday amid a new wave of doubts that the country can solve its economic ills. The plunge also drove down stocks and currencies in other Latin American countries.

Argentina's main stock index, the Merval, fell 6.1% after the government was forced to pay investors more than 14% interest on 91-day treasury bills to help refinance $850 million in dollar-denominated debt. The unusually high rates reflect the degree of the government's desperation, analysts said.

In Brazil, whose economy is closely tied to Argentina's, stocks fell 2.4% and the currency sank to its lowest value ever against the dollar. Analysts said Brazil's problems reflect a certain amount of Argentine contagion as well as its own economic problems, including an energy crisis severe enough to stunt growth this year. The exorbitant interest rates exacerbate Argentina's double bind of crushing debt and shrinking economic growth. The country is in the third year of recession and suffers from 15% unemployment. A succession of fiscal measures has not changed the crux of the government's problem: It spends vastly more than it takes in and borrows heavily to make up the shortfall.

The latest rates on Argentine t-bills are up from 9% paid on similar bills last month and are more than 10 points higher than what the U.S. government pays on comparable securities.

As global investors' doubts about Argentina have mushroomed in recent days, investors have demanded higher yields on bonds of other developing economies as well.

Argentine stocks, which had held steady for much of this year, have crumbled over the last two weeks. On Tuesday, the Merval index plunged 22.70 points to 347.11, its lowest since January 1999.

The decline comes a day after Argentine President Fernando de la Rua made an impassioned Independence Day speech warning Argentines that they had to stop living beyond their means, calling for further government budgets cuts and sacrifices. But De la Rua lacks the political clout to carry out belt-tightening measures.

Analysts agreed that Argentina has hit a low point. "The only way this can work is if Argentina makes a strong announcement in the area of fiscal austerity and a multi-party political agreement to make spending cuts," said Fernando Losada, senior Latin America economist at ABN Amro in New York.

Observers say Argentina needs to cut at least $3 billion, and maybe twice that, to put its financial house in order and restore investor confidence. The stakes are high not just for Argentina but also for Brazil and other Latin American countries, said Gray Newman, economist at Morgan Stanley.

"We are in a classic mode of financial contagion," Newman said, referring to Brazil's problems. Brazil's key share index slid 2.4% to 13,569.70 on Tuesday, its lowest since December.

The darkening panorama comes only weeks after Argentina's Economy Minister Domingo Cavallo engineered a $29-billion debt swap in early June that seemed to buy the beleaguered country time and briefly heartened investors.

But a succession of bad news, including continued deflation, high unemployment and poor tax collections, has turned the outlook sour.

Fears pushed yields on Brazil's bellwether 14-year C bond to 14.7% Tuesday, up from 11.84% as recently as March, said James Sha of ABN Amro. The difference between U.S. government bond yields and those of emerging-market bonds, as reflected in the J.P. Morgan EMBI Plus index, has increased from 7.10 percentage points in early June to 8.38 points now, a sign of investor apprehension, Sha said.

**Argentina's debt accounts for 23% of all emerging-market debt.**

[Once again, the critical point is buried at the bottom. --Andre]

Among other Latin markets, Chile's main share index fell 0.7% on Tuesday and Peru's lost 1%, but Mexico's IPC index inched up 0.1%. The Mexican market has been a relative safe haven this year and still is up nearly 19% year to date.



-- Andre Weltman (aweltman@state.pa.us), July 11, 2001

Answers

Headline: Dollar Falls on Concern Argentine Turmoil May Damp U.S. Growth

Source: Bloomberg, 11 July 2001

URL: http://quote.bloomberg.com/news2.cgi? T=sa_worldnews.ht&s=AO0xVgRXGRG9sbGFy&TZ=:Brazil/East

The dollar fell to a two-week low against the euro on concern rising Argentine borrowing costs may damp economic growth in Central and South America and crimp U.S. exports to the region. Prospects for weakness in U.S. stocks, given a continued flow of companies slashing profit forecasts, also dragged on the currency, analysts said.

The dollar is declining on concern ``the U.S. economic slowdown might be more far-reaching'' than previously thought, said Greg Salvaggio, a currency analyst at Tempus Consulting in Washington.

The U.S. currency weakened to 86.30 cents per euro, from 85.50 late in New York yesterday, and reached its lowest level since 86.59 on June 27. The dollar sank to 124.55 yen, from 125.42, touching a one- week low. It also fell against the Swiss franc and British pound.

Argentina paid a record 14 percent for a treasury bill sale yesterday, as investors fretted a three-year recession may force the nation into default. The Brazilian real and Mexican peso both tumbled a second day.

U.S. exports to Central and South America amounted to 6.1 percent of a total $782.4 billion worldwide last year, according to U.S. government data. Argentina alone accounted for 0.6 percent of total U.S. exports. ``A Latin American debt crisis may affect a second-half U.S. recovery,'' said Savvas Ladonikolas, a currency trader at ING Barings in London. That worry is pushing the dollar lower, he said.

Eastern Europe

Switzerland's currency rose to its strongest in almost two months, leading the euro up as well, as it attracted investors fleeing East European currencies such as the Hungarian forint, said analysts.

Concern about emerging markets prompted some investors to move money out of the Hungarian forint and Polish zloty, analysts said. The forint has dropped 11 percent and the zloty 11.5 percent against the dollar in the past five days.

Many investors trade the zloty and forint against the euro, said Mitul Kotecha, head of currency research at Credit Agricole Indosuez. ``When those are sold, it benefits the euro,'' he said.

Roiled debt and currency markets in Latin America may also have helped the yen, said traders.

Investors who had borrowed in Japan, where interest rates are near zero, and then invested in Latin American countries are now moving to reverse those trades, buying back yen. Some investors ``were long a lot of these emerging-market currencies against the yen and are unwinding that,'' said John McCarthy, a director of trading at ING Baring (U.S.) Capital Markets.

-- Andre Weltman (aweltman@state.pa.us), July 11, 2001.


Argentina's Woes Spur Fears of New Crises Debt Problems Shake Emerging Markets

By Paul Blustein Washington Post Staff Writer Thursday, July 12, 2001; Page E01

A bout of turmoil in emerging markets worsened yesterday amid growing worries that Argentina will be forced to default on its massive foreign debt, raising the specter of another round of crises similar to the ones that buffeted Asia, Russia and Latin America in the late 1990s.

Latin American markets were hit the hardest yesterday as the Brazilian currency, the real, and the Chilean peso fell at one point to record lows, and Argentina's main stock index dropped 2.2 percent to a new 2001 low, after the Argentine government encountered severe difficulty inducing investors to buy its treasury bills Tuesday.

Currencies and stock markets in countries as disparate as South Africa and Taiwan were also off sharply, as was Turkey's, where stocks lost 7.8 percent and the Turkish lira fell to its lowest rate ever, even though the International Monetary Fund indicated it will soon disburse the next installment of the nation's $19 billion loan package.

The selling wave began intensifying last week, and analysts and officials agreed that it doesn't yet pose nearly the threat to the global economy that arose after a near-default by South Korea in late 1997 or the default by Russia in August 1998.

But the fallout from Argentina's economic woes provided ominous evidence of the continued danger from "contagion," in which financial turbulence spreads across national borders and even oceans. Although Argentina's economy is smaller than those of such previous crisis victims as Korea, Russia and Mexico, the bonds that have been issued by its government account for roughly one-fifth of the bonds in emerging-market portfolios held by overseas investors. So markets have become deeply unsettled by signs that Buenos Aires is losing its struggle to pay interest and principal on those bonds.

"Contagion is not an insignificant phenomenon, and we're seeing some of it at work right now," said Mark Siegel, managing director for emerging bond markets at David L. Babson & Co.

If the market downdraft persists, it could present the Bush administration with an awkward challenge. Treasury Secretary Paul H. O'Neill has tacitly criticized his Clinton administration predecessors for being too quick to assume that giant, IMF-led rescue efforts are needed to quell crises because of fears of contagion. And John Taylor, the Treasury undersecretary for international affairs, said earlier this week that he believes the troubles in emerging markets are attributable mainly to factors unique to the countries involved.

But some analysts said that if anything, contagion has become more problematic now because it stems partly from weakness in the world's biggest economies, particularly the United States. The currencies and stock markets of countries such as Taiwan and Singapore -- which this week said it has entered a recession -- have slipped sharply in recent weeks along with the fall in their exports to the once-booming U.S. market. The Singapore dollar is hovering near an 11-year low.

"One of the reasons I'm more concerned now than I was with some of the things that happened in '97 and '98 is that in '97 and '98 the U.S. was this big robust economy," said David Rothkopf, chief executive of Intellibridge Corp., a firm that provides information and advice to multinational companies and investors.

In the past, contagion spread primarily from one emerging market to another, for two main reasons. The first involves trade: When one currency weakened, it made other countries' exports relatively less competitive on world markets, so their currencies came under pressure, too. Second, investors whose holdings fell in one country's market often felt forced to sell securities from other markets to raise cash or to offset their losses.

Both forms of contagion may be at work as a result of the problems in Argentina. The country is suffering from a three-year recession, and analysts have become increasingly skeptical that the government can pay the high interest on its $130 billion debt without imposing politically unpalatable economic austerity policies on the population.

Argentina has already received a substantial package of IMF assistance, and the government recently swapped about $20 billion of its short-term debt for longer-term bonds, thereby lifting some of the immediate threat of a default. But that move, in the opinion of many analysts, only postponed the day when the government will have to tell investors that they must simply accept reduced payments on their claims.

The latest sign of the financial vise closing in on Argentina came Tuesday when the government had to offer investors an interest rate of more than 14 percent in order to sell 91-day treasury notes, so that it could raise the funds needed to pay $850 million in dollar- denominated debt coming due.

Even local Argentine banks refused to buy more government notes this week, said Mohamed El-Arian, managing director of Pacific Investment Management Co., "which is the same dynamic which took place in Russia in August '98."

Responding to yesterday's market plunge, Economy Minister Domingo Cavallo vowed to eliminate the budget deficit from this month forward by cutting spending and fighting tax evasion.

The prospect of a severe shock to the Argentine economy poses an obvious threat to Brazil, which does a substantial amount of its trade with its neighbor. And investors have grown increasingly reluctant to buy Brazilian securities, which has driven up the Brazilian government's interest costs, dampening market sentiment further in a classic vicious circle.

http://washingtonpost.com/wp-dyn/articles/A48822-2001Jul11.html



-- Martin Thompson (mthom1927@aol.com), July 12, 2001.


[Perhaps this should be called the "Financial Contagion" thread.]

Headline: Turklish Stocks Dive Amid Jitters

Source: Reuters via International Herald Tribune, 12 July 2001

URL: http://www.iht.com/articles/25879.html

Turkish stocks plunged again Wednesday as lack of confidence at home and woes in Argentina swept away optimism over progress on a $15.7 billion International Monetary Fund rescue pact.

Shares on the main Istanbul National-100 index closed down 7.8 percent at 8,730 points, and the troubled currency, the lira, dropped to a record low of 1.3 million liras per dollar after the central bank began a second auction selling dollars for liras.

"There are lots of rumors in the market that Argentina is in big trouble and is in risk of default, and that the same could be said for Turkey," said Cem Tozge, capital markets analyst at Ata Invest in Istanbul.

Concern over woes in Argentina, which paid the highest interest rates in five years in a short-term $850 million domestic auction on Wednesday, spread through other emerging markets on Wednesday afternoon. "It's a global sell-off and Turkey and Argentina are in the worst situation," said Selim Cevikel, head of research at Credit Lyonnais in Istanbul.

Analysts welcomed progress to resolve Turkey's dispute with the IMF over reforms but remained cautious, citing the prevailing lack of confidence in Prime Minister Bulent Ecevit's three-party coalition government.

Turkey on Tuesday seized five private banks and revised the board of the state-owned Turk Telekom in a bid to satisfy IMF demands and release $1.56 billion of the loan package.

The IMF later announced it would meet Thursday to review the stalled loan program, a move expected to free up crisis funds before the end of the week.

"The market was wary because there is still a lack of trust," one banker said. "That can only be built up if the government does everything it has to, and on time."

-- Andre Weltman (aweltman@state.pa.us), July 12, 2001.


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