CONTAGION FROM ARGENTINA HAS SPREAD TO BRAZIL, PARAGUAY AND URUGUAY

Contagion from Argentina has spread to at least three neighbours, in the view of one of the least cited rating agencies: Coface, France's export insurance company, which takes a very hardnosed approach to the matter, because its decisions have an immediate repercussion on insurance costs. Last week Coface downgraded the risk rating of four Latin American countries: Brazil, Paraguay, Uruguay and Venezuela. In the first three cases it cited the impact of the Argentine crisis as a factor.

In all four cases, the risk rating was downgraded from B to C.

Regarding Brazil, Coface cites the economic downturn of the last three quarters of 2001, which it sees as caused by the global economic slowdown, the crisis in Argentina, the domestic power crisis and the increase in domestic interest rates.

On top of this, it notes, came an increase in current account outlays as a consequence of higher interest on the external debt.

Coface says that the most `disquieting' factor on the Brazilian scene is the negative turn of market confidence as a result of uncertainty regarding the forthcoming presidential elections.

The depreciation of the Real and the increased cost of borrowing, says Coface, `weaken the public accounts, weigh upon the level of activity and increase the fragility of companies indebted in dollars.'

In the case of Paraguay, Coface notes that the Argentine crisis has aggravated the recession that began in 1988 because of `an economic management that was not propitious for investment.'

Even though Paraguay's indebtedness ratios are `relatively weak,' says Coface, the strong depreciation of the guaraní, the country's limited access to borrowing abroad and the depletion of its reserves, all weaken its payments capacity. Moreover, it says, while the ruling Colorado party remains embroiled in internal squabbling, the government faces growing `social agitation'.

Uruguay, says Coface, affected by the Argentine crisis and with an economy that has contracted by more than 10% in the first quarter, after three years of recession, is no longer the region's `safe haven', and Argentine capital is moving elsewhere.

The odd one out is Venezuela, where Coface does not cite the Argentine crisis, but focuses instead on what it sees as mutually reinforcing political and economic crises. This, it says, creates an environment that could lead to increased defaults and bankruptcies.

Latin American Weekly Report 09 July 2002

Source:www.latinnews.com