Latin America in jaws of crisis

SAO PAULO - GOVERNMENTS in Latin America stepped forward on Thursday to reassure markets left despondent by fears of a global recession and Argentina's decision to nationalise pension funds.
Brazil and Mexico took measures to try to stop the long slide of their currencies against the dollar, while an Argentine official promised the pensions grab would not mean state intervention in banks and companies managing the funds.

Brazil's central bank also aggressively jumped in to support its currency, the real, promising to pump the equivalent of an extra US$50 billion (S$75 billion) into the market through currency swaps, causing the money to jump 3.25 per cent against the greenback.

Mexico announced an auction of an extra US$1.4 billion to support the tumbling peso, which on Wednesday had sunk to a record low of 13.74 to the US dollar.

Those efforts, along with official affirmations that countries in the region were well-placed to come through the crisis with little more than bruises, did little to offset volatility in equities, however.

On Thursday, the stock market in the region's biggest economy, Brazil, closed 3.57 per cent lower, extending deep losses of more than 10 per cent the day before.

Mexico's bourse closed 5.26 per cent down.

Argentine shares ended 2.43 per cent higher - a small consolation after the two previous days when the Buenos Aires stock market lost more than 26 per cent.

That was largely in reaction to the decision on Tuesday by Argentine President Cristina Kirchner to nationalise pension funds controlling US$30 billion.

Although she portrayed it as protecting retirees from the global crisis, analysts saw it more as a plundering of the funds to service the national debt, which stands at US$150 billion.

'It looks like they want to use the workers' money for non-pension spending,' Dr Gregorio Badeni, a professor at the University of Buenos Aires, told The Economist magazine.

The newspaper La Nacion quoted several lawyers as saying many of the 9.5 million clients affected were inquiring about suing the government over the move.

An Argentine government official, speaking to AFP on condition of anonymity, said however that Ms Kirchner was not looking to intervene in the management companies or private pension funds.

'That's not our intention, and in any case we couldn't do it from a legal point of view,' he said.

A Merrill Lynch executive handling Latin American investments told AFP his bank had now written off Argentina as an investment destination 'for at least the next half decade' because of the decision.

In Brazil, the woes caused by the global financial crisis have prompted further action from the government, which had been caught unprepared by the extent to which investors were also stepping back.

On Wednesday, Finance Minister Guido Mantega said state-run banks were now authorised to help shore up financial institutions left vulnerable by the sudden appreciation of the dollar against the real, which has lost more than 30 per cent of its value in just under a month.

Mr Mantega stressed that Brazil's banking system was 'solid' and said no bank in the country risked going under.

In Peru, the crisis was hitting hard despite a projected nine percent economic growth this year.

Analysts worried that investors were fleeing, and that inflationary pressures were rising. Gross domestic product expansion would probably be cut by at least two points next year, they said.

Part of the slide is due to the slump in copper prices. Peru is the second-biggest producer in the world, after Chile, and the price for the metal has halved in recent weeks.

Mr Oscar Dancourt, a former central bank director, said that could cause the current account deficit to swell.

'The outlook for the future is for inflationary pressures and even a recession. The strengthening of the dollar will also worsen inflation because the prices of various imported products are tied to the exchange rate,' he said.

The country's president, Mr Alan Garcia, has sought to soothe, telling investors on Monday they could 'have faith and confidence in Peru' and predicting the country would survive relatively well 'the international earthquakes' hitting the financial system. -- AFP


Popular posts from this blog

Do you want to get into Goldman Sachs?

Warren Buffett’s favorite market metric suggests investors are ‘playing with fire’