Are We There Yet? by ProQuest


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We      To get out of this crisis we
        need to unfreeze credit
        markets. For this we need

        the IFIs and governments.
        by Pablo E. Guidotti

           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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