Unlike the 1990s, when the region embraced financial globalization during a period of negative or neutral real shocks, the current decade is marked by positive, real trends such as an improvement in terms of trade, low world interest rates, and subsiding risk spreads (namely, the spread between the interest rate paid by an emerging market economy's government on its debt and that paid by the U.S. Treasury). [...] instead of rising external debts and current account deficits, most countries in the region registered what have been called twin surpluses- in the current account of the balance of payments and in the fiscal balance. [...] measures directed at the financial sector have not yet adequately produced a full recognition of losses and addressed the consequences of the implied shortfall in bank capital.
Are We To get out of this crisis we need to unfreeze credit markets. For this we need There the IFIs and governments. by Pablo E. Guidotti Yet? It is now clear that the advanced economies are facing a severe recession in 2009, with an output contraction of 2 percent according to the IMF’s latest pro- jections.1 The volume of global trade in goods and services is expected to contract by almost 3 percent in 2009, and non-fuel commodity pric- es will likely decline by as much as 30 percent (while oil prices are expected to fall by about 50 percent). Global industrial production at the end of 2008, measured by the annualized three- month percentage change, was already falling at an annual rate of over 13 percent, while the value of world merchandise exports contracted at an annual rate of over 40 percent. Although a portion of the sharp decline in world trade can be attributed to a collapse in trade finance in the fourth quarter of 2008, its severity poses sig- spring 2009 Americas Quarterly 49 nificant risks to economic activity across the globe. by the financial institutions’ desire to circumvent It’s easy to be pessimistic about what this will existing prudential regulations, especially those mean for Latin America, especially as troubling head- requiring them to hold enough capital against risky lines spread across newswires almost every day. But assets, along with a search for higher yields in a con- smart action by both governments and internation- text of historically low interest rates. In the presence al financial institutions could reinforce the region’s of weak regulatory and supervisory systems, such already considerable strengths and enable it to emerge conditions combined to accelerate the market melt- from this crisis with minimal long-term damage. down.3 As the financial crisis erupted, both financial This hope is anchored in the fact that the region’s and capital markets became dysfunctional. As confi- policy framework and economic performance have dence collapsed across financial institutions, inter- strengthened significantly in the past decade. Latin est rates rose and lending froze in the short-term America entered the global financial crisis after a five- interbank markets as well as in important segments year period of significant and sustained economic of the commercial paper market. As a result, the real expansion. Unlike the 1990s, when the region embraced economy started to suffer. financial globalization during a period of negative or In emerging markets, past financial crises have neutral real shocks, the current decade is marked by displayed two distinct, although interrelated, com- positive, real trends such as an improvement in terms ponents. On the one hand, the collapse of confidence of trade, low world interest rates, and subsiding risk leads to the above-mentioned freezing of financial spreads (namely, the spread between the interest rate and capital markets as counterparty risk (namely, the paid by an emerging market economy’s government on risk that the counterparty in a financial transaction its debt and that paid by the U.S. Treasury). defaults) soars and the search for liquidity becomes Thus, instead of rising external debts and cur- the single most important short-term objective of rent account deficits, most count
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