A Lurch But Not a Fall
Some countries are better positioned than others for the economic downturn.
From the perspective of financial markets, the U.S. and even the world, the financial and economic meltdown of October 2008 is already greater than what we saw in the 1980s—something not experienced since the Great Depression. Mervin King, the Governor of the Bank of England, calls it “the largest financial crisis since World War I.” And the long-term effects on the economy are only just becoming apparent. The International Monetary Fund (IMF) now forecasts global growth at or below 1 percent (in market prices) in 2009. As recently as April 2008, it was forecasting growth of 2.6 percent and, most likely, in its next revision, it will forecast a global contraction of about 1 percent in 2009.
In October 2008, following the bankruptcy of Lehman Brothers on September 15, the core of the global financial system imploded. Interbank transactions among major global banks practically stopped. What began in July as a reversal of the commodity bull market and the first in a series of landmark government interventions has yielded a landscape that is today littered with battered portfolios, record levels of hedge-fund redemptions and a market that for all intents and purposes has ceased to function outside government guarantees. Combined with its rapid spread across developed and developing markets, the intensity of the shock prevents any comparison with past Latin American and Asian economic upheavals post-World War II. Because it started in the United States, unlike the Tequila Crisis of 1994–1995 or the Asian crisis of 1996–1997, the financial meltdown of 2008 was by definition systemic. The crisis also finds Latin American economies in varying states of ability to deal with the meltdown and its aftereffects.
In the early months of the crisis, countries such as Brazil, Chile and Peru were able to weather the storm by relying on internal growth momentum and keeping a steady hand at the rudder of macroeconomic management. Mexico and Colombia showed earlier and deeper strains, more buffeted by global conditions. Now, facing the multiple challenges of exchange-rate volatility, declining commodity prices and a credit crunch, in addition to the legacy of severe pre-crisis macroeconomic mismanagement, countries such as Argentina, Ecuador and Venezuela risk real economic turmoil. And, with an upcoming electoral cycle in many of these countries, there will be a political effect—though how large and important remains open, and of concern...