Money & Investing

Economic Turmoil Spreads
Throughout Latin America

By JONATHAN KARP and PAMELA DRUCKERMAN
Staff Reporters of THE WALL STREET JOURNAL

Economic policy makers in Latin America are urging investors to fasten their seat belts, but many are strapping on their parachutes instead.

Financial markets in South America are riding one of their wildest waves of turmoil in years due to concerns over a slowing global economy and doubts that Argentina can finance its debt and pull itself out of recession. Aggravating the situation in Brazil, the continent's biggest economy, are poor trade figures and a widening political scandal that threatens to derail economic reforms aimed at enhancing Brazil's investor appeal.

Currencies from Brazil to Chile tumbled Monday following Argentina's latest jolt to investors. In the face of rising interest rates, Economy Minister Domingo Cavallo canceled an auction, scheduled for Tuesday, of $350 million in Treasury bills to cover maturing debt held mostly by local banks and companies. Economists said Argentina can easily cover that amount and other short-term debt commitments through May, but the auction's cancellation appeared to scare investors.

"Confidence has been shattered," said Arturo Porzecanski, chief emerging-market economist at ABN AMRO Inc. "I think there is downright hysteria -- people are selling no matter the price."

Argentina's benchmark sovereign bond slid to its lowest level since the Mexican peso crisis in 1995. The Floating Rate Bond, closed Monday at a spread of 16.9 percentage points over U.S. Treasurys, up nearly three percentage points from Friday's close. By comparison, when Brazil devalued its currency in January 1999, the Floating Rate Bond traded at almost 12 percentage points over U.S. Treasurys.

The plunge in Argentine bond prices reflected concern that Buenos Aires might default on or restructure its debt, or even devalue its peso. Brazil's currency and share prices swooned in early trading. The real hit historic intraday lows and reached yet another record low close in Brazil, 2.259 to the dollar, compared with 2.236 on Friday. The benchmark Bovespa index recouped its early losses to close up 1.4% at 13892.65 points.

In Chile, traders sought refuge in dollars. The Chilean currency closed at 602.60 pesos to the dollar in Chile, its third historic low in six trading sessions. Spillover from Argentina, the weaker real in Brazil and falling copper prices, which are key to Chile's export earnings, have weakened the peso 6.8% since the beginning of February.

Mr. Cavallo, Argentina's economic minister, sought again to calm jittery markets, first with an open letter to Wall Street that rebuked investors for not recognizing what he said were fundamental improvements in the country's fiscal situation since he took office a month ago. Later, in Buenos Aires, he again denied persistent market rumors that Argentina would be forced to restructure part or all of its roughly $128 billion foreign debt.

Despite the cancellation of the Treasury bill auction, late Monday Argentina's economy ministry said it had sold $1billion in three-year, variable-rate bonds to a syndicate of five local banks. The sale completes a $3.5 billion debt program announced earlier this month, to repay short-term debt.

A senior U.S. Treasury official said Monday that Mr. Cavallo hasn't asked for additional funding from the U.S. or from multilateral agencies, and that the U.S. expects Argentina to manage its economy without such aid. The statement followed U.S. President Bush's weekend remarks that it is "too early" to make a determination on loans for Argentina. In December, the International Monetary Fund led a $40 billion bailout package for Argentina.

Despite Mr. Cavallo's pledges to win back investors, Latin markets are expected to remain volatile in the coming weeks. The problem, said Douglas Smith, head of Latin American economic research at IDEAglobal in New York, is that "there is nothing that Cavallo can do to shock the market with a positive surprise."

Meanwhile, other countries such as Brazil are battling their own economic challenges. The central bank Monday reported trade and foreign-investment figures that underlined Brazil's vulnerability to an external shock.

Brazil's current-account deficit for the year to March 31 widened to 4.6% of gross domestic product, from just under 4.5% for the year to February. The current-account deficit in March alone was $2.59 billion, compared with $1.66 billion in February, the central bank said. The ballooning deficit, caused by higher foreign-debt interest payments, makes it less likely that Brazil will be able to finance the gap with foreign direct investment.

Foreign direct investment in Brazil in March was $2.1 billion, sharply higher than in January and February, but still below last year's pace as well as the projected current-account deficit for 2001.