Financial Crisis of South America, ‘Domino’

After Argentina proclaimed ‘DEFAULT’ in the end of the last year, the major economic countries of South America such as Brazil, Uruguay, Venezuela have been facing the financial crisis.

Brazil has the highest risk of the default. Moody`s, US credit information services changed its ratings outlook to negative from stable for Brazil`s B1 foreign-currency country ceiling for bonds and notes. UK Pitch ICBA adjusted its rating down to ‘B+’ from ‘BB-‘. Even though the central bank of Brazil input USD 01 billion, the REAL dropped to 2.77 REAL per dollar, the lowest point on June 20 since 1999. Bobespa of Sao Paulo stock markets slumped by 5.1% on June 20. It was the biggest drop since US 9.11 terror.

The change in outlook reflects the real and potentially lasting impact on the government debt dynamics that can result from a sharply negative change in investor sentiment that has emerged in recent weeks. The confidence of resident and non-resident investors has shifted because of perceived uncertainties associated with the outcome of the October election. US large investment banking such as Morgan Stanley and Merrill Lynch interrupted the new investment to Brazil and collected bonds.

Due to imprudent expenditures of Fernando Henrique CARDOSO who is the president of Brazil, the public debts came close to USD 29 billion twice as much as Argentina. It raised the economic unrest. Also, Brazil has the aggravation of the foreign economic conditions through decreasing the export by 30% due to difficulties of Argentina where was the major trading country last year.

Uruguay also is facing the financial unrest. Uruguay was called as ‘Switzerland of South America’ once. The country maintained the financial stabilization, but has been in financial difficulties due to withdrawn international capitals. Total deposits decreased by above 35%.

Alberto BENSION, the minister of Economy of Uruguay, announced, “We will abandon the fixed exchange system and execute the fluctuating exchange system of PESO”. This is the emergency measure to prevent the bankruptcy of the national economy.

Venezuela tried to bring the foreign capital of USD 3.5 billion to fill up the financial deficits this year, but took only 10% of the target capital. Peru proclaimed martial law due to continuing riot against the privatization of the utility companies.

On June 18, IMF announced to support USD 4.8 billion and 1.5 billion to Brazil and Uruguay to prevent the financial crisis respectively.

Wall Street Journal reported on June 20, that the financial unrest of South America delays the recovery of US and EU economy of uncertainty. So many experts worried about that the international economy would be depressed again.

However, some experts forecast that the financial crisis of South America will not influence the world economy because the western financial institutions experienced in Asian crisis have the positive risk management such as reserving the bad debt provision of USD 10 billion

Mi-Kyung Jung mickey@donga.com