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3,300 | <s>[INST] If it is forced into either, [/INST] the next biggest economies, Argentina and Mexico, could well follow suit. </s> |
3,301 | <s>[INST] This will directly harm US economic wellbeing because Latin America is the most important emerging market [/INST] for US exporters, because US bank exposure to the region is higher than it is to Asia and Russia, and because Mexico is part of the North Atlantic Free Trade Area. </s> |
3,302 | <s>[INST] More than that, if Latin America follows Asia into a recessionary spiral, the economic reforms that opened it [/INST] up to the world market after a violent and inflationary decade will be at risk and so could the "Washington consensus", the idea that economic modernisation is best performed by liberalising goods and capital markets. </s> |
3,303 | <s>[INST] No wonder that economic policymakers in the [/INST] US, Latin America and the International Monetary Fund were in frantic consultation yesterday. </s> |
3,304 | <s>[INST] The Asian crisis, having swept [/INST] through Russia, is now engulfing the continent. </s> |
3,305 | <s>[INST] Its biggest economy, Brazil, is fighting [/INST] to avoid a currency collapse or a debt moratorium. </s> |
3,306 | <s>[INST] If it is forced into either, [/INST] the next biggest economies, Argentina and Mexico, could well follow suit. </s> |
3,307 | <s>[INST] This will directly harm US economic wellbeing because Latin America is the most important emerging market [/INST] for US exporters, because US bank exposure to the region is higher than it is to Asia and Russia, and because Mexico is part of the North Atlantic Free Trade Area. </s> |
3,308 | <s>[INST] More than that, if Latin America follows Asia into a recessionary spiral, the economic reforms that opened it [/INST] up to the world market after a violent and inflationary decade will be at risk and so could the "Washington consensus", the idea that economic modernisation is best performed by liberalising goods and capital markets. </s> |
3,309 | <s>[INST] No wonder that economic policymakers in the [/INST] US, Latin America and the International Monetary Fund were in frantic consultation yesterday. </s> |
3,310 | <s>[INST] The same message has yet to hit home [/INST] to the US Congress, which is obsessed with President Bill Clinton's moral character. </s> |
3,311 | <s>[INST] A Congressional panel on Thursday rejected a request for [/INST] an $18bn (£10.9bn) capital increase to the global financial system's main fire fighter, the IMF. </s> |
3,312 | <s>[INST] The proposal is not dead yet, but Republican congressmen still appear more concerned about "moral hazard" - [/INST] the idea that helping the fire brigade may encourage people to smoke in bed - than about what some US policymakers think is the worst financial crisis since the Great Depression. </s> |
3,313 | <s>[INST] The country most immediately threatened is Brazil, where a [/INST] flight of capital has been draining the country's hard currency reserves at an alarming rate. </s> |
3,314 | <s>[INST] Dollar outflows reached almost $11bn in the first [/INST] 10 days of September, nearly as much as in the whole of August. </s> |
3,315 | <s>[INST] Brazilian as well as foreign [/INST] investors have been dumping Brazil risk at whatever cost. </s> |
3,316 | <s>[INST] The stock market fell 16 [/INST] per cent in one day (Thursday) before recovering yesterday. </s> |
3,317 | <s>[INST] The country still has, by most guesses, more than $50bn [/INST] in the reserves, but given the level of its short-term debt repayments this is far from excessive. </s> |
3,318 | <s>[INST] "Brazil," says one official at a [/INST] Washington international financial institution, "is the China of Latin America". </s> |
3,319 | <s>[INST] That is worrying because in Brazil economists can point to well recognised policy flaws, in particular a fiscal [/INST] deficit that this year could reach 7 or 8 per cent of gross domestic product at a time of world financial crisis and domestic political uncertainty: a general election is due on October 4. </s> |
3,320 | <s>[INST] Last October, as the Asian crisis first began [/INST] to spread, Brazil doubled interest rates and announced spending cuts of about R$22bn. </s> |
3,321 | <s>[INST] But most failed to materialise, spending went on rising and this week, [/INST] with bond and stock prices plummeting, the government was forced to double overnight interest rates to about 40 per cent a year. </s> |
3,322 | <s>[INST] The higher rate adds about R$8bn a year to the [/INST] cost of servicing government debt - and it is not clear where the government can find the money. </s> |
3,323 | <s>[INST] By law, public workers [/INST] cannot be sacked during an election period. </s> |
3,324 | <s>[INST] "Their only option now is to sharply reduce the public [/INST] sector payroll and immediately tackle social security spending," says Arturo Porzecanski, chief economist at ING Barings in New York. </s> |
3,325 | <s>[INST] Paradoxically the crisis has helped President Fernando [/INST] Henrique Cardoso's standing: he now appears set for a first-round victory. </s> |
3,326 | <s>[INST] That might help him get [/INST] the political approval he needs for spending cuts. </s> |
3,327 | <s>[INST] "The time has come to [/INST] start talking about ugly choices," says Mr Porzecanski. </s> |
3,328 | <s>[INST] "If what they're trying doesn't work, then [/INST] we come down to the unthinkable: currency controls, devaluation, or a debt moratorium". </s> |
3,329 | <s>[INST] Everyone from President Carlos Menem [/INST] downwards has sought to emphasise its strong economic fundamentals. </s> |
3,330 | <s>[INST] All the same, in their stampede out of emerging markets, foreign investors fear that the [/INST] centrepiece of Argentine economic stability - a currency board system that links the peso at par to the US dollar - would be vulnerable to a Brazilian devaluation. </s> |
3,331 | <s>[INST] This system, which in effect hands over the setting of interest [/INST] rates to the markets, is already pushing rates higher: Argentina is seeing the early stages of a credit crunch. </s> |
3,332 | <s>[INST] I have no worries whatsoever about convertibility [/INST] [the currency board] being under threat," said a senior central bank official yesterday. </s> |
3,333 | <s>[INST] "But I am worried that if this turmoil [/INST] persists for the next three to six months, then we will have a recession". </s> |
3,334 | <s>[INST] Such an outcome might well be seen [/INST] as punishment for policies that markets are supposed to approve of. </s> |
3,335 | <s>[INST] If Argentina goes the way of Russia, [/INST] then what, many will ask, is the advantage of freeing up markets? </s> |
3,336 | <s>[INST] Back in Washington, the view is growing [/INST] that protection against abrupt changes in market behaviour will be needed. </s> |
3,337 | <s>[INST] One may be discussed as early as next [/INST] Monday, at the meeting of senior officials of the Group of Seven leading industrial nations. </s> |
3,338 | <s>[INST] One possibility, in the words of one of their [/INST] officials, is a plan "to create instruments for emergency financing that do not presently exist". </s> |
3,339 | <s>[INST] These would allow for the [/INST] instantaneous disbursement of funds to beat back speculative attacks. </s> |
3,340 | <s>[INST] The funds would be short-term and relatively expensive, but would allow [/INST] governments to avoid policy responses - such as the Russian debt moratorium - that have spooked investors in the past. </s> |
3,341 | <s>[INST] The plan, which it is hoped will [/INST] be unveiled at the IMF-World Bank meetings in October, raises many questions. </s> |
3,342 | <s>[INST] One is whether it will be enough, particularly if the IMF is not [/INST] strengthened; more immediately, the question is whether it will be ready in time to help if Latin America does indeed fall over the brink. </s> |
3,343 | <s>[INST] ___ Document 211 of 600 View of currency board weaknesses [/INST] is not shared by Argentina Author: Powell, Andrew Publication info: Financial Times [London (UK)] 07 Sep 1998: 20. </s> |
3,344 | <s>[INST] accountid=28034 Abstract: Sir, The "Unpalatable truths of a currency board" (August [/INST] 31), which discusses whether a currency board is appropriate for Russia, contains some truths but also some often repeated misconceptions. </s> |
3,345 | <s>[INST] As pointed out, a currency [/INST] board does indeed reduce monetary and fiscal discretion. </s> |
3,346 | <s>[INST] Monetary policy must always be subservient and therefore consistent [/INST] with the fixed exchange rate, and fiscal policy must be consistent with the availability of non-inflationary financing. </s> |
3,347 | <s>[INST] However, it is simply incorrect to claim that (1) a currency board implies [/INST] that there is no lender of last resort and that (2) banks need to have greater capital ratios or other regulations need to be stronger. </s> |
3,348 | <s>[INST] Sir, The "Unpalatable truths of a currency board" (August 31), [/INST] which discusses whether a currency board is appropriate for Russia, contains some truths but also some often repeated misconceptions. </s> |
3,349 | <s>[INST] As pointed out, a currency [/INST] board does indeed reduce monetary and fiscal discretion. </s> |
3,350 | <s>[INST] Monetary policy must always be subservient and therefore consistent [/INST] with the fixed exchange rate, and fiscal policy must be consistent with the availability of non-inflationary financing. </s> |
3,351 | <s>[INST] However, it is simply incorrect to claim that (1) a currency board implies [/INST] that there is no lender of last resort and that (2) banks need to have greater capital ratios or other regulations need to be stronger. </s> |
3,352 | <s>[INST] First, it is perfectly possible to have a central bank acting as a liquidity lender of last resort under a [/INST] currency board as shown by the experience of Argentina in 1995, and all a currency board implies is that any "loser of last resort" must be transparently fiscal in nature and not financed through the inflation tax. </s> |
3,353 | <s>[INST] That this may affect the political feasibility of bailing [/INST] out some financial institutions is another advantage, not a disadvantage, of a currency board system. </s> |
3,354 | <s>[INST] Second, given the greater underlying economic volatility, there is a strong [/INST] argument that emerging markets need stricter banking sector regulations than their G10 counterparts whatever monetary policy rule is adopted. </s> |
3,355 | <s>[INST] Indeed, a case might be made that given the reduction in economic volatility and lower interest rates that accompanies the adoption of a successful [/INST] currency board, less strict banking regulations might be required relative to a country with similar characteristics but with a different monetary policy - although I hasten to add that this is not practised in Argentina where banking regulations are substantially more exacting than international norms. </s> |
3,356 | <s>[INST] Whether a currency board is appropriate for [/INST] Russia is a complex and essentially political question that deserves much deeper analysis. </s> |
3,357 | <s>[INST] The economic desirability of a currency board is in part determined by [/INST] the trade-off between the advantages of a discretionary monetary policy versus the risk, for whatever motive, of the misuse of that discretion. </s> |
3,358 | <s>[INST] It seems odd, however, given that Italy, Spain, Portugal and Ireland - to name but four participants [/INST] - are about to give up virtually all monetary and substantial fiscal discretion, that it is considered that this trade-off for an emerging country like Russia may go the other way. </s> |
3,359 | <s>[INST] Perhaps the issue is really the feasibility [/INST] of the maintenance of the currency board, rather than its desirability. </s> |
3,360 | <s>[INST] Andrew Powell, chief economist, Central Bank of [/INST] Argentina Reconquista 266, Capital 1003, Buenos Aires, Argentina Copyright Financial Times Limited 1998. </s> |
3,361 | <s>[INST] ___ Document 212 of 600 Latin America gets dose of reality INTERNATIONAL BONDS [/INST] INVESTORS NO LONGER 'DECOUPLE' REGION FROM CRISES IN ASIA AND RUSSIA: Author: Grant, Jeremy Publication info: Financial Times [London (UK)] 07 Sep 1998: 28. </s> |
3,362 | <s>[INST] accountid=28034 Abstract: Only a few months ago, it was fashionable - indeed [/INST] accurate - to speak of Latin American debt markets as having "decoupled" from the turmoil in Asia and the gathering gloom in Russia. </s> |
3,363 | <s>[INST] Investors were prepared to separate Latin American risk from the [/INST] contagion affecting emerging markets elsewhere, allowing governments to keep their borrowing plans on the international capital markets fairly intact. </s> |
3,364 | <s>[INST] In the secondary markets, Latin American bonds were trading at far less [/INST] of a discount to their par value than their equivalent Russian benchmarks, which were bumping along at levels that implied sovereign default. </s> |
3,365 | <s>[INST] Full text: Only a few months ago, it was fashionable - indeed [/INST] accurate - to speak of Latin American debt markets as having "decoupled" from the turmoil in Asia and the gathering gloom in Russia. </s> |
3,366 | <s>[INST] Investors were prepared to separate Latin American risk from the [/INST] contagion affecting emerging markets elsewhere, allowing governments to keep their borrowing plans on the international capital markets fairly intact. </s> |
3,367 | <s>[INST] Argentina and Venezuela each managed to pull off a [/INST] bond issue with relative ease while appetite for other emerging market paper was at an all-time low. </s> |
3,368 | <s>[INST] In the secondary markets, Latin American bonds were trading at far less [/INST] of a discount to their par value than their equivalent Russian benchmarks, which were bumping along at levels that implied sovereign default. </s> |
3,369 | <s>[INST] But in the space [/INST] of a fortnight, all that has changed. </s> |
3,370 | <s>[INST] The waves of contagion sparked by Russia's default [/INST] and ensuing political crisis have hit Latin America, scaring away even the hardiest investors. </s> |
3,371 | <s>[INST] Talk of decoupling has dissipated as key [/INST] stock markets in the region have plummeted and currencies have slipped. </s> |
3,372 | <s>[INST] Moody's Investors Service, the rating agency, confirmed the end of decoupling [/INST] last week by downgrading certain foreign debt ratings for Venezuela and Brazil, and reviewing Argentina and Mexico for possible downgrade. </s> |
3,373 | <s>[INST] "This [development] is incontrovertible," said Richard [/INST] Fox, director Latin American sovereigns at rating agency Fitch IBCA. </s> |
3,374 | <s>[INST] "The question is how much of it is general [/INST] portfolio adjustment by people trying to cover themselves for losses in Russia or a more long-term thing. </s> |
3,375 | <s>[INST] The first and most significant is that the [/INST] cost of borrowing has increased dramatically since Russia hit an economic brick wall. </s> |
3,376 | <s>[INST] The J.P. Morgan emerging markets bond index, which measures the spread on a basket [/INST] of emerging market bond yields over the benchmark US Treasury yield, rose to 1,476 basis points on Friday, compared with 850 basis points almost three weeks ago. </s> |
3,377 | <s>[INST] That has potentially serious implications for Argentina, which has been [/INST] a deft borrower and is the most dependent of all the Latin American countries on the international capital markets. </s> |
3,378 | <s>[INST] SG Emerging Markets estimates that $11.1bn [/INST] in redemptions on Brady bonds and eurobonds fall due next year. </s> |
3,379 | <s>[INST] This is money that the country will be hard [/INST] pressed to find if, as economists predict, the region faces a contraction in gross domestic product. </s> |
3,380 | <s>[INST] Any contraction in the Brazilian economy - exacerbated by the expected maintenance [/INST] of tight monetary policy - will automatically hurt Argentina, as 40 per cent of its exports are bought by its larger neighbour. </s> |
3,381 | <s>[INST] That will make it more difficult to meet its [/INST] borrowing requirements one fiscal quarter ahead of time, as it has managed to do so far. </s> |
3,382 | <s>[INST] And with investor appetite for all emerging market asset classes gone, it will also force the [/INST] country to turn to other sources of financing, such as the domestic bond market, syndicated loans and funds that have not yet been drawn down from an International Monetary Fund facility. </s> |
3,383 | <s>[INST] Tim Love, head of global and Latin American emerging markets strategy at SG Emerging Markets, [/INST] said Argentina has a good reputation as a borrower but it may not be enough to keep investors interested as its external debt of $130bn is worryingly high. </s> |
3,384 | <s>[INST] "They've done everything you can do in textbook [/INST] terms when it comes to spreading risk in debt service and in currency diversity. </s> |
3,385 | <s>[INST] But the Achilles Heel is [/INST] the absolute level of debt," he said. </s> |
3,386 | <s>[INST] Brazil, a less frequent [/INST] visitor to the markets, faces two problems. </s> |
3,387 | <s>[INST] It must find a way to service about $50bn in [/INST] redemptions and interest payments in the domestic bond market by end-October, while foreign exchange reserves are falling. </s> |
3,388 | <s>[INST] Although it has an $80bn privatisation programme [/INST] in the pipeline, Brazil cannot rely on these revenues in current market conditions. </s> |
3,389 | <s>[INST] Mexico, which has also been placed on review, has [/INST] no external borrowing requirements in 1998 and 1999 and is thus much less affected by the move. </s> |
3,390 | <s>[INST] "Because Latin America has been through many crises in the past, [/INST] policy-makers have a better understanding and awareness of what they need to do at times like this," said Fitch's Mr Fox. </s> |
3,391 | <s>[INST] It forces them to do [/INST] things that they should have done anyway". </s> |
3,392 | <s>[INST] ___ Document 218 of 600 Swift Russian stabilisation programme urged CAVALLO VISIT ARCHITECT OF [/INST] ARGENTINA'S SUCCESSFUL CURRENCY BOARD SUMMONED TO MOSCOW FOR ADVICE ON FINANCIAL CRI: Author: Freeland, Chrystia Publication info: Financial Times [London (UK)] 04 Sep 1998: 02. </s> |
3,393 | <s>[INST] accountid=28034 Abstract: Russia must swiftly introduce a radical financial stabilisation programme if it is [/INST] to prevent the economy from plunging into hyperinflation, Domingo Cavallo, Argentina's former economy minister, said yesterday after two days of consultations with the Russian government. </s> |
3,394 | <s>[INST] "The currency has already devalued a [/INST] lot," Mr Cavallo said in an interview with the FT. </s> |
3,395 | <s>[INST] "This process will continue unless [/INST] there is appropriate action taken soon by the government... </s> |
3,396 | <s>[INST] I hope they will [/INST] do something within the next few weeks". </s> |
3,397 | <s>[INST] On arrival, Mr Cavallo immediately found himself [/INST] at the centre of a crucial debate over the nation's future. </s> |
3,398 | <s>[INST] On one side are advocates of radical stabilisation [/INST] measures, led by Boris Fyodorov, deputy prime minister, and advised by Mr Cavallo. </s> |
3,399 | <s>[INST] They are opposed by amore conservative lobby, which [/INST] is pushing for a return to command-economy measures such as currency controls and soft credits. </s> |
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