Development & Aid, Economy & Trade, Europe, Financial Crisis, Headlines, Latin America & the Caribbean

South America on Guard Against Europe’s Economic Woes

Fabiana Frayssinet*

RIO DE JANEIRO, May 20 2010 (IPS) - Although the European Union’s financial bailout of Greece to avoid contagion of the crisis to other eurozone countries has had positive effects, South America is not ruling out collateral damage, especially from austerity measures demanded from Spain and Portugal and being considered for other EU countries.

The vice president of the Brazilian Foreign Trade Association (AEB), José Augusto de Castro, told IPS there is concern about fluctuating international prices of commodities, which according to the organisation’s statistics comprise between 75 and 80 percent of exports from the Southern Common Market (MERCOSUR), made up of Argentina, Brazil, Paraguay and Uruguay.

He also said that between 30 and 35 percent of the bloc’s commodity exports go to the EU, its second largest market after China, which absorbs 45 percent.

The rescue package approved May 10 by the EU, which includes an emergency fund of 750 billion euros (940 billion dollars) to help eurozone countries in distress, caused commodity prices to fall back to pre-crisis levels, after a generalised surge.

De Castro said the eurozone bailout “was initially positive” for MERCOSUR, because it allowed prices to stabilise. But he warned of possible contagion even beyond the bounds of the European bloc “if a package this size should fail.”

Argentine economist Marina Dal Poggetto, of Estudio Bein, a financial consultancy, said she does not believe the South American economy is in danger of collapse at present, in spite of some fluctuations in exchange rates due to earlier jitters about the problems in Greece.

In an interview with IPS, Dal Poggetto said the European Central Bank (ECB) is watching like “a hawk” to prevent economic failures in the bloc, in contrast to the attitude taken by its equivalent in the United States, the Federal Reserve (or Fed), in the crisis that originated in the U.S. in 2008 and spread to the global economy.

She said the ECB “monitors inflation and the deficit, not the systemic risk,” and is therefore “more orthodox” and rigorous than the Fed was, in requiring fiscal cuts and adjustment in other areas of the weakest economies in the EU.

“The risk is too great,” and they are not going to let a European financial collapse happen, she said.

However, the effects of the bailout package and the adjustments it requires to reduce the fiscal deficits of Greece, Portugal and Spain may affect trade.

De Castro predicted slower growth in the European economies, and “reduced imports” as a result.

Any “expansion and deepening of the European crisis would be very negative for us,” said Luciana de Sá, head of economic development at the Federation of Industries of the state of Rio de Janeiro.

But de Castro examined a different angle of the crisis, in terms of how it may affect Argentina, which has just launched a debt swap of its treasury bonds for new bonds at a discount and with a longer due date, in order to regain access to international capital markets.

If the international financial market refuses its bonds, Argentina will have an added problem, de Castro said. In his view, Venezuela, which helped Argentina in the past by buying bonds, cannot do so now because of the fall in oil prices, Caracas’ main source of revenue.

Brazil could be an alternative financier for the Argentine economy, given its massive international reserves amounting to 250 billion dollars, equivalent to 16 percent of GDP. But that would be a difficult political decision to take in an election year when Brazilians will be choosing a successor to President Luiz Inácio Lula da Silva.

Fernando Cardim of the Federal University of Rio de Janeiro’s (UFRJ) Institute of Economics agreed with de Castro that the European rescue package has already had short-term effects in the region. The most obvious one is the recovery of stock and currency markets “as speculators were reassured,” he told IPS.

On a pessimistic reading of the situation, Cardim said it could turn out to be similar to the beginning of the 2008 global financial crisis, when Argentina and Brazil experienced “the flight of foreign capital back to its countries of origin” to mend the damage there.

For her part, the executive secretary of the Economic Commission for Latin America and the Caribbean (ECLAC), Alicia Bárcena, sounded the alarm about the influx of foreign direct investment, which could be curbed if the Greek crisis spreads to the rest of the EU.

At a press conference in Chile before the announcement of the EU rescue package and the adjustment plan for Spain, Bárcena spoke about the financial effects on telecommunications, banking and the electricity industry, areas in which European and especially Spanish investments are of key importance in the region.

Cardim said that Spain is the limit for the region’s peace of mind, in the sense that if the crisis reaches Spain, South Americans “should begin to worry,” although on the other hand he said the probability of this happening was low.

Brazil’s Finance Minister Guido Mantega seemed unperturbed. He told the press that his country is in better fiscal shape than most of the member countries of the EU, although he acknowledged that the crisis could have a slight effect on Brazilian exports to Europe.

He said Brazil’s strong reserves are a shield that protects the economy against international financial turbulence.

The hard currency in the country’s coffers at present exceeds the public debt of approximately 200 billion dollars, while the trade surplus for this year is projected at 20 billion dollars, said de Castro, outlining Brazil’s positive economic numbers. “It would have to be a very big crisis to affect Brazil,” he said.

Luciano Coutinho, the president of the national development bank, the BNDES, was even more upbeat. He told the local newspaper O Globo that the European crisis might even have a positive effect, by moderating economic growth and so fending off the possibility of a resurgence of inflation.

With growth recently forecast at seven percent for 2010, overheating of the Brazilian economy could cause a rise in inflation, which was estimated at the beginning of this year at an annual 4.5 percent and has already been revised upwards to 5.5 percent.

De Castro matched the government’s optimism, saying “the European crisis will prevent the authorities from raising the base interest rate” to cool down economic growth and prevent price hikes.

* Additional reporting by Marcela Valente in Buenos Aires.