Friday, December 02, 2011

IMF Seeks Latin American Support to End the European Financial Crisis

Bloomberg: IMF’s Lagarde Seeks Latin America Help for Europe in “Historic About-Turn”
IMFdirect: Latin America-Taking the Helm
La República: Las dos posibles razones de la visita de Lagarde
Washington Post: Lagarde Suggests Latin America Safeguards Against Europe Crisis

Christine Lagarde, the Managing Director of the International Monetary Fund (IMF), is visiting three countries in Latin America this week, Peru, Mexico, and Brazil. Analysts believe that Ms. Lagarde has strategically chosen to visit these countries in particular to gain financial support to help Europe emerge from its debt crisis. Brazil is one of the foremost emerging economies in the world; Mexico will chair the Group of 20 (G-20) for 2012 (a group of finance ministers and central bank governors from the world’s 20 major economies); and Peru boasts one of the strongest emerging economies in Latin America. Experts think that Ms. Lagarde is travelling to Latin America and other countries holding large international reserves to secure bilateral loans to the IMF to fund loans to Europe during the crisis. Brazil, for example, has more than $350 billion in international reserves. The IMF alone, which has approximately $390 billion available for lending, may not be able to finance loans to Europe if the crisis continues.

Ms. Lagarde has emphasized that there are many ways beyond providing funds in which Latin America can help Europe, including through information sharing. Latin America’s experience in recovering from the debt crisis that led to many countries defaulting on their debt during the 1980s could serve as a model for Europe. In the past decade, Latin America has reaped financial and social benefits from becoming a model economic region that has grown because of reasonable fiscal policies implemented in the wake of its debt crisis. This year, the region experienced 4.5 percent economic growth, compared to 1.6 percent for developed nations. Although they have expressed a willingness to help Europe, Latin Americans have made it clear that Europeans should take responsibility for a problem they created and come up with specific solutions to end the debt crisis and keep it from spreading to other countries. Furthermore, Latin Americans are hesitant to help Europe and the IMF without receiving some benefit in return. Brazil, for instance, hopes that the IMF decides on a formula for calculating voting quotas that gives greater voting power to the world’s strongest emerging economies, even though the IMF already agreed to increase their voting power earlier this year.

Analysts also believe that Ms. Lagarde intends to warn Latin American countries during her visit that, despite their current economic success and stability, they may be vulnerable to the effects of the European crisis. Prior to her visit to Latin America, Ms. Lagarde suggested that Latin America could also be affected by the European financial crisis. Thus, while the crisis is currently Europe’s problem, it could become Latin America’s as well. She argued that Latin American countries must, therefore, implement preventive measures to strengthen and further stabilize their economies, such as continuing to increase domestic savings and protecting the banking sector, to guard against the effects of an economic slowdown if the financial crisis worsens.

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