Friday, September 19, 2008

Latin America Heaves a Sigh of Relief and Investor Nerves Calm

Russia, Brazil Lead Record Emerging Market Gain; Bonds Rally, Sept. 19
Brazil's Real Climbs 5.5% Following US Bailout Plan News, Sept. 19
Latin America Bonds: Colombia Peso Debt Drops Most in Two Years, Sept. 18
Peso colombiano cierra con caida de 2,95 pct Reuters/Yahoo Noticias, Sept. 17
America Latin, ante periodo de vacas flacas tras crisis financiers en EE.UU. Noticias RCN, Sept. 18

News of the U.S. bank bailout, which was announced by U.S. Treasury Secretary Henry Paulson on Friday, came just in time for Latin America. Before the announcement, growing concerns about a domino effect from struggling U.S. markets had lead many foreign investors to leave these emerging markets. Latin American currencies were tumbling. By Thursday, the Mexican peso had slid 9.9 percent against the dollar from its August 4 high. The Colombian peso had fallen 6.3 percent since the Lehman Brothers bankruptcy, hitting its weakest since March, 2007. In Latin American, global market instability affects more than the financial markets. A weakening economy also threatens the demand for raw materials. Raw materials have been the principal driver of the recent economic growth throughout most of Latin America. They make up 65 percent of Brazilian exports, and as prices for commodities like oil and grain surged, so did the Brazilian economy. By Thursday, Latin American economists were recommending a period of "conservatism" and "belt tightening" as fears of a global recession increased.

On Friday, after the U.S. bailout plans were announced, emerging market currencies and bonds rebounded drastically. Bonds rallied the most since 2001. The Brazilian real, Latin America's reference point, led the currency rally. The Colombian peso also climbed an incredible 7.3 percent against the dollar on Friday. That is the biggest jump for the Colombian peso in 13 years. Investors who had recently left the Latin American markets for "safer bets" came running back. "The U.S. government needed to do something as the system was wobbling. The plan seems to have calmed nerves," said Jason Viera, an economist in Sao Paulo.

1) The drastic fluctuations throughout Latin America this week demonstrate how closely the region is tied to the overall global economy. What does this mean for the average citizen of these countries?

2) Before Friday's bailout announcement, economists were recommending that Latin American countries enter a period of greater conservatism, especially when it comes to consumer credit. Many economists continue recommending that strategy. Is this a good recommendation for Latin America? Would it be good for some countries and not others?

3) Most countries are directly impacted by the financial decisions made in the U.S. Is there a way these countries can have a say in those financial decisions? Should they have a say?

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