On Jan. 7, as Argentina announced plans to devalue its peso by 29 percent after the biggest debt default ever, Brazil and Mexico went to global markets to sell US$2 billion of bonds. By day's end, investors had snapped up US$2.75 billion of debt -- 38 percent more than originally offered -- at yields at or below expectations.
The appetite for bonds from Latin America's largest economies shows that investors are confident Argentina's collapse is national, not regional. Forecasters predict growth in Mexico, Brazil and Chile will pick up this year, bolstering the optimism.
Mexico's economy, Latin America's biggest, will expand 1.4 percent this year after a 0.3 percent drop last year as US demand rises for goods such as auto parts, according to a Mexican central bank survey. Inside Mexico, most consumers are prospering from a currency that gained 5.9 percent against the US dollar from the beginning of last year through Friday and from interest rates that dropped about 10 percentage points in the same period.
In Brazil, Latin America's second-biggest economy, the budget surplus before interest payments rose 14 percent last year to 43.7 billion reais (US$17.7 billion), exceeding by 9.2 percent the target set with the IMF.
Economists expect gross domestic product to rise 2.5 percent this year and inflation to slow from 7.67 percent.
In Chile, the sixth-biggest economy, GDP is expected to increase 3.3 percent. In October, when Chile sold US$650 million in global bonds, it locked in the lowest borrowing rate of any Latin American nation.
"Brazil would be a good place to put your money," says Mohamed El-Erian, who helps manage US$7 billion at Pacific Investment Management Co. "It's a significant economy with improving fiscal trends and a good financial position."
So far, Argentina's crisis hasn't spread beyond its borders, which distinguishes it from the financial meltdowns of the 1990s: When Mexico devalued its peso in December 1994, inflation shot up to 52 percent and a US-led group supplied a US$50 billion line of credit. When Thailand freed its currency from the dollar peg in 1997, currencies across Asia plunged. And when Russia defaulted on US$26 billion of debt in 1998 and Brazil's real tumbled in 1999, investors fled emerging markets.
US$280 Billion Crisis
Long before Eduardo Duhalde took over Jan. 1 as the nation's fifth president in two weeks and inherited a US$280 billion economy in crisis, the region was preparing for Argentina's collapse. Companies cut exports and closed offices in the nation.
Brazil was recovering from its devaluation after receiving US$41.5 billion in IMF credits. In Mexico, the election of President Vicente Fox of the National Action Party ended 71 years of Institutional Revolutionary Party rule. Fox, who took office on Dec. 1, 2000, cut his budget three times last year after lower oil prices reduced government revenue.
By comparison, Argentina's economy has been in recession since 1998, a slump aggravated by a refusal until January to end the peso's decade-old one-to-one peg to the US dollar. The link made it difficult for Argentine goods to compete.
On Feb. 3, Argentina said it would let the peso float against the dollar and convert all bank deposits and loans into pesos. The currency plunged as much as 17 percent on Feb. 11, the first day it traded under the new system.
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