IMF: Latin America Faces ‘Toxic’ Threat in Europe Crisis

The European debt crisis and falling commodity prices may become a “toxic mix” for Latin American economies, the International Monetary Fund said today.

Latin America may suffer from tighter credit because Euro area banks account for a quarter of bank assets in the region’s “larger” countries, Nicolas Eyzaguirre, director of the Washington-based lender’s Western Hemisphere department, said in a blog. If Euro banks become “starved” for short-term dollar funds, they may further limit lending in the region.

“We will not be immune if the risks move to the foreground,” Eyzaguirre wrote on the IMF website about the impact of the European crisis on Latin America. “Fewer external credit lines available to banks could trigger a credit crunch in Latin America” that, along with falling commodity prices, may create “a toxic mix for growth and stability.”

The IMF’s forecasts for the region haven’t improved since October, when the lender forecast economic growth of 4.5 percent for 2011 and 4 percent this year, Eyzaguirre wrote. Latin American countries may need to increase public spending to stimulate growth if the crisis deteriorates further, the director wrote.

Europe, Weaker Growth

Peru’s government already has boosted spending to sustain growth while Chile has created a contingency plan that may entail tapping into a $15 billion offshore fund to help improve employment, investments and liquidity if the global downturn worsens.

“There may come a time to spend public money to fight a downturn,” wrote Eyzaguirre, who was Chile’s finance minister from 2000 to 2006. “To be sure, we don’t see a recession coming in Latin America if the European crisis remains contained, but weaker growth is clearly in the cards, not least because confidence and commodity prices have been falling.”

The price of commodities, which account for more than half of the region’s exports, declined 7.8 percent last year, according to the Bloomberg commodity index, which calculates the mean of indexes including energy, grains, food, precious metals and livestock.

Many Latin American countries learned to protect liquidity during the 2008 and 2009 crisis, when the region posted 4.3 percent growth before contracting 1.7 percent, respectively, Eyzaguirre wrote. Some already are taking proactive steps to ease monetary policy.

Central bankers in Brazil cut their Selic lending rate 150 basis points last year to 11 percent to shore up the economy. Banco Central do Brasil’s next two-day policy meeting starts Jan. 17.

And in a bid to boost liquidity, Chilean policy makers last month started a 91-day repurchase operation in which lenders can sell assets to the bank before buying them back for a fee.

“For the most part, banks are sound, monetary policy frameworks are increasingly credible, international reserve coverage is adequate, and public finances are strong,” Eyzaguirre wrote. “The key will be to hold that position. Overall, as 2012 kicks off, our advice is to hope for good news, but prepare for the bad.”

To contact the reporter on this story: Randall Woods in Santiago at rwoods13@bloomberg.net.

To contact the editor responsible for this story: Philip Sanders at psanders@bloomberg.net.

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