Re; a virus?

Jim Drysdale jimd48 at
Wed Dec 19 22:32:55 MST 2001

Wednesday, 19 December, 2001, 15:27 GMT
Argentine crisis ripples spread
The rapid descent into chaos has spooked economists

By BBC News Online's James Arnold
Riots and looting on the streets of Buenos Aires have sparked jitters among
economic pundits around the world.

If Argentina, once Latin America's richest and most advanced economy, can
descend into near-anarchy in so short a time, what are the chances of
trouble spreading?

Chaos in one emerging economy has a nasty habit of infecting the next - as
happened in 1997-98, when a Russian devaluation followed hard on the heels
of the Asian economic collapse.

This time around, however, all-out "contagion" might just be avoided.

Hardened by the buffeting of the 1990s, most emerging markets - but by no
means all - now look robust enough to evade the worst of the crisis.

Contagion counts

Emerging-market contagion is an irrational, but nonetheless substantial,
fact of life.
The big-ticket investors who drive global financial markets tend to regard
emerging markets, from Albania to Zimbabwe, as an entirely homogeneous

When one country is afflicted, the assumption is that all are tainted; a
crisis in Zambia can spark an investment exodus from Armenia, for example.

During the 1980s and early 1990s, many emerging markets became heavily
dependent on inflows of such "hot money", financial market capital chasing
hefty, but highly speculative, returns.

During the late 1990s, dozens of countries, particularly across Asia and
Eastern Europe, learned for the first time that such money can disappear as
quickly as it arrived.

Russia's collapse into financial crisis in August 1998 caused capital flows
to the developing world to dry up almost completely.

Even the rich suffer

Nor is this sort of thing a problem only for those who live in Armenia,
Albania, Zambia and Zimbabwe.

The rapid growth in cross-border corporate investment means that an
increasing number of jobs in the rich world depend on emerging markets.

It is a rare multinational company that has no emerging-market investments;
for some, notably in the financial sector, consumer goods and tobacco,
emerging economies are pretty much the only place to unearth respectable

August 1998 took its toll on the financial industry, and on a swathe of
firms that had dived over-zealously into the Russian market.

Now, some fear that a Latin American slump could hit the bottom line of
firms from Manhattan to Madrid.

Stronger this time

Thankfully, however, fears of 1998-style contagion seem to be overdone this
time around.

There should be less chance of bad news spreading from one country to
another, since many governments have modified their policy regime, precisely
with the aim of avoiding contagion a second time.

Russia, in particular, emerged from the last crisis considerably stronger
than it went in.

And even if investment speculators were to attack all emerging markets at
the same time, it may not have such a devastating effect as in previous

Most emerging economies are far less dependent on flows of short-term
investment than they were in the 1990s.

This was put to the test earlier in the year, when a number of important
markets - including those in Argentina, Brazil and Turkey - rattled sharply

Despite a raft of gloomy predictions, those jitters did not become crises.

Local difficulties

But the Argentine crisis may not be without its casualties.

The group closest to the firing line are Argentina's Latin American
neighbours, which are threatened twice over.

First, they are subject to the same sort of investor punishment that
Argentina is currently suffering.

Brazil, in particular, which has bigger and more open financial markets than
Argentina, is frequently used as a near-proxy by investors.

Its stock market has lost almost 30% of its value this year; only Egypt,
Turkey and Argentina itself have performed worse among emerging markets.

Second, given Argentina's pivotal importance as a trading and financing
partner in Latin America, no economic disruption there can be without its

Again, Brazil has become a major centre for exporting to the Argentine
market - where demand is falling fast.

Third, and possibly most damaging in the long term, Argentina's fall from
grace does great harm to Latin America's economic reputation, which has in
any case been decidedly fragile for the past decade.

Latin America and the Caribbean will grow just 0.5% this year and 1.1% in
2002 as the effects of a global downturn hit the region, according to a
United Nations economic agency.

Currency crunch

The other group in potential trouble are those emerging markets that share
some key characteristics with Argentina.

The most important thing to watch here - and what has really aroused
investors' ire - is the currency board, under which the Argentine peso is
pegged immovably to the US dollar.

The peso peg, in place since 1991, when it was highly fashionable among
economists, is now seen as the root of Argentina's troubles, restricting
freedom of movement, overvaluing the peso, and substituting governmental
rigour for free-market flexibility.

Now, investors are asking searching questions of other countries with
currency boards, a select band that includes Hong Kong, Estonia and

It might not be all-out contagion, but Argentina's current ills may still
prove catching to some.

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