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Friday, September 11, 1998 Published at 14:38 GMT 15:38 UK


Business: The Economy

Latin American nightmare

Traders under stress at the Mexico stock market

Latin American financial markets have been hammered with investors unconvinced at government efforts to bolster economies against the global financial turmoil.

The Brazilian government was forced to raise interest rates to nearly 50% after its stock market went into a tailspin.


[ image: It's all too much for one Argentinian trader]
It's all too much for one Argentinian trader
Trading on the Brazilian exchange was suspended as the Bovespa index slipped 6.13% in the first 30 minutes of trade. It ended down 15.8%, its largest one-day drop in 11 years.

The plunge caught other regional markets in its tailwind, dragging bourses down from Mexico City to Buenos Aires.

"The order is get out of the market, regardless of price," said Fernando Romero Caranza, a Latin American analyst with ABN Amro in New York.

"We're stuck in a perverse cycle of self-fulfilling prophesies. The market wants blood and it is getting it."

The Argentine exchange posted the second-harshest fall in the region, finishing down 13.32%, and Mexican shares tumbled 9.82%.

Chile closed down 7.38%, its largest one-day percentage drop since October 6, 1998, and Venezuelan shares ended at a 30-month low, off 4.48% for the day.

Currencies under pressure

Latin American currencies and bonds also reeled from the turmoil.

Mexico's peso closed at a record low of 10.52/10.55 to the US dollar even after the central bank intervened three times in efforts to shore it up.


[ image: Traders on Brazil's Bovespa stock market in Sao Paolo are facing a rough ride]
Traders on Brazil's Bovespa stock market in Sao Paolo are facing a rough ride
Investors fear that a currency devaluation in Brazil - Latin America's biggest economy - could ripple across the region and devastate economies recovering from the 1994 "Tequila crisis" triggered by a devaluation in Mexico.

Those concerns pummelled the Brazilian bourse and led to almost $2bn in outflows from its foreign exchange markets on Thursday.

That is in on top of about $8.77bn lost in in the first nine days of September and $12bn lost in August.

The country's foreign exchange reserves - one of the largest in the developing world - have been seriously dented.

The Brazilian central bank was forced to raise interest rates to nearly 50% in a bid to plug the massive outpouring. Interest rates stood at 19% at the beginning of the week.

Venezuela's currency is also under pressure as the country's main export - oil - has been hit by a global slump in demand this year due to the Asian crisis.

Clinton impeachment fears

US President Bill Clinton's problems only worsened the already fragile situation by adding the prospect of impeachment to the world's list of worries.

"Clinton is basically affecting the market in the United States, and by affecting the United States, it is affecting us," said Argentine trader Julian Cohen.

Investors appear unconvinced by Latin American governments that have moved to shield their economies from the problems that devastated Asia and Russia.

On Tuesday, Brazil announced measures aimed at trimming the country's budget deficit, currently standing at 7% of gross domestic product.


[ image: Brazilian traders and investors fear a currency devaluation]
Brazilian traders and investors fear a currency devaluation
In Mexico, Latin America's second largest economy, President Ernesto Zedillo promised to do all he can to end the recurring six-year cycle of economic breakdowns.

Argentine officials have already cut $2bn from this year's planned spending and the government passed labour and tax reforms aimed at reducing the financial burden on employers.

President Carlos Menem also said he had frozen public spending for next year at 1998 levels.

Menawhile Venezuela has announced spending cuts of $540m.

But analysts said the reforms have failed to help, mostly because investors are not convinced by Brazil's attempts.

ABN Amro's Romero Caranza said: "Brazil has a lack of credibility, and since it is an important market, that lack of credibility is flowing into other countries in the region."



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