Argentina's crisis threatens Brazil's faltering economy

September 01, 2001

Brazil is the powerhouse of Latin America: by far the region's largest economy - and largest debtor - it acts as a proxy for the rest of South America. And it's in trouble. The slowing global economy is pumping less money into the country, an energy crisis has created an internal supply shock, and uncertainty over next year's elections is increasing. At the same time, Brazil's exports are too low, its population too poorly educated, and its domestic savings woefully inadequate if it is to compete on the international stage. With all of that to contend with, the last thing Brazil needed was the tango effect: contagion from neighbouring Argentina. Felix Salmon asks whether Brazil, along with the rest of South America, is falling back into crisis

Odair Abate, the chief economist of Lloyds TSB in São Paulo, explains that Brazil is gripped by a crisis of confidence. The worse it performs, the less faith the population has in it. That, in turn, only serves to exacerbate the situation to the point where Brazil now compares unfavourably with every other Latin American nation, including Argentina. The good news is that for the moment this crisis is confined to the fortunes of the national football team. The bad news is that there's no reason why it might not spread to the economy.

A quick glance at Brazil's macroeconomic statistics is enough to show the straits it's in. Most of the blame can be laid at the feet of the currency, which has depreciated by 25% this year, forcing the central bank to raise interest rates in an attempt to stick to its inflation target of 4%. The central bank gave itself a two percentage point margin on either side, but most analysts now believe inflation is going to overshoot 6% this year, an embarrassing outcome for central bank president Arminio Fraga.

Argentina's crisis threatens Brazil's faltering economy

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