- Associated Press - Monday, August 15, 2011

BUENOS AIRES — Latin America wasn’t crushed by the world’s last financial crisis, and it has never been so well-equipped to handle another global meltdown.

But no place in the world is safe from the U.S. and European economic slowdowns.

Latin America’s stock markets dipped as much as 15 percent immediately after the historic Standard & Poor’s U.S. debt downgrade this month. To protect the region’s hard-won gains, analysts say, a unified response may be the best defense.

“If the global turbulence is of such an immense magnitude that the contagion reaches the entire global economy, even the most immunized systems won’t be able to resist this kind of attack,” said Augusto de la Torre, chief economist at the World Bank. “There is a limit to the capacity of Latin American economies to withstand external shocks, depending on their size.”

Finance ministers and central bank presidents from Mexico and the Union of South American Nations, known as Unasur, were seeking a unified response as they met in Buenos Aires on Friday.

Proposals included a shared currency basket to decouple regional trade from the dollar and the euro, regional investment banks to foster growth, limits on speculative purchases of sovereign debt and protections for products made in Latin America.

“Latin America is sitting on more than $700 billion in reserves, and we can’t just be spectators of a loose global monetary policy, which only serves to revalue our currencies, hurt our export sectors and devalue our reserves,” Colombian President Juan Manuel Santos told the Associated Press in a weekend interview.

The region’s overall economic growth is a healthy 4.5 percent this year, and its interest rates are relatively high, offering better returns than in the U.S., where the economy is growing at less than 2 percent and interest rates are at historic lows.

And with some of Europe’s leading economies in negative territory, China’s excess capital and unsold goods are likely to flow south instead.

Latin America’s central banks should respond by making sure those capital inflows don’t simply increase dollar-denominated reserves or foster a consumer credit boom that could end in another debt crisis, said Neil Shearing, a senior economist at Capital Economics in London.

Instead, he said, the money should be dedicated to infrastructure projects and joint ventures that help integrate Latin America’s economies. That, in turn, would keep currencies from rising and local manufacturers from becoming less competitive.

Brazil’s economic growth already is slowing as its currency appreciates and cheaper imports flood in. While mining revenues in Chile and Peru are rising for now as investors seek havens in gold and copper, slowing industrial demand for metals could deflate all kinds of commodities, hitting resource-rich Latin America particularly hard.

Venezuela, Mexico and Argentina may be most vulnerable to seeing their economies stall.

“We’re looking at a difficult picture for manufacturing worldwide. There aren’t enough consumers on the planet to absorb all the production, and without markets, the whole world goes out in search of the most solid countries, like Brazil,” said that country’s finance minister, Guido Mantega.

Venezuela’s cash reserves are depleted, its inflation is the region’s highest, and the U.S. buys more than half its crude. Georgetown University economist Ramon Espinasa said U.S. purchases of Venezuelan oil fell 14 percent from April to July, even before the debt downgrade.

Mexico has reduced its non-petroleum exports to the U.S. from 90 percent to 78 percent over the past nine years; it has $200 billion in reserves; and it has been a world leader in gold purchases.

But “there’s no antidote” to the U.S. downturn that will enable Mexico to match last year’s growth of 5.5 percent this year, said Gerardo Rodriguez Regordosa, the deputy treasury secretary.

Argentina’s Economy Minister Amado Boudou said his country is fiscally sound and has enough central bank reserves and leadership to confront the crisis with its own recipe of limited imports, loose credit and generous government subsidies.

“Countries that are following the beat of the world are experiencing turbulence. As Argentines, we can take another stand,” said Mr. Boudou, who doubles as President Cristina Fernandez’s running mate in her re-election campaign, at a rally Wednesday.

But Argentina’s dogged effort to keep its peso pegged at roughly four to the dollar has fueled inflation that could spiral out of control after October’s presidential election, said economist Aldo Abram, director of the Buenos Aires-based Foundation for Liberty and Progress.

“The countries of this region can’t do anything in this crisis but try to stay afloat and not drown,” he said.

Ideas proposed for the Unasur meeting - and some of their drawbacks - include:

*A currency basket. Proposed by Colombia, this combination of local currencies and dollars, euros and yen could provide a shared unit for regional trading that would help decouple economies from the dollar and insulate currencies from predatory attacks. Argentina and Brazil have tried it on a smaller scale with bilateral currency swaps but without much success because Latin America’s major commodities are traded almost exclusively in dollars, said Mr. Shearing of Capital Economics in London.

*A common currency. Venezuela and Bolivia hope the whole continent can trade in the “sucre.” But the idea has never gained much traction, and given the European Union’s struggle to maintain the euro, it has even less support now.

*A regional bank to foster trade. Mr. Boudou says technicians already are developing the infrastructure for a “Bank of the South” so that it’s ready once there’s political will. This will depend largely on Brazil, which outpaces all its neighbors in trade, Mr. Shearing said.

*Devoting more reserves to regional investments through organizations such as the Latin American Reserve Fund or the Andean Development Corp. Peru is pushing for this idea, but because Brazil holds nearly half the region’s bank reserves, its decision here will be key.

*Protectionist measures. Brazil moved against the “predatory competition” of cheap imports last week, providing tax exemptions for vulnerable industries and preferential treatment in government purchasing.

But given the rising real, even paying 25 percent more for products made at home may not save the factories, said economist Flavio Castelo Branco of Brazil’s National Industrial Confederation. He predicts a flood of inflation-causing capital and cheap imports that will mean even greater losses in the market for Brazilian products.

*Limiting currency speculation. Brazil recently imposed rules against short-term purchases of sovereign debt, aimed at fending off speculative attacks on the currency. But other kinds of currency controls have failed to keep Venezuela and Argentina from suffering capital outflows, which has contributed to the region’s highest inflation rates.

*Countercyclical spending. Mexico and Chile struggle to follow their own rules to save in good times and spend in the bad. Argentina’s government credits its spending with saving the country from disaster in 2008, but it has kept spending high even as growth tops 6 percent, calling U.S. and European austerity measures bad medicine.

A unified stand against external challenges is the ministers’ mantra. But the countries’ differing fiscal policies and economic realities make single regional response difficult to achieve.

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