In this work we discuss econometric evidence on four major issues that relate to the six largest Latin American economies (Argentina, Brazil, Chile, Colombia, Mexico, and Peru) during the two consecutive international financial crises between 2008 and 2012. Our first concern has to do with the mechanism of transmission of the international financial crisis and its secondary effects on the real and financial sectors of our sample countries. The second aspect that we explore refers to the actual magnitude of both, real and financial effects of the crisis. Our third objective has to do with an evaluation of the role played by individual countries' external macroeconomic vulnerability. And, finally, we propose a contra-factual analysis of the growth performance of our sample of Latin American economies, with the growth performance they would have experienced in a hypothetical scenario of no external turmoil.
TopIntroduction
The 2008-2009 Global Financial Crisis revealed the serious limitations of the financial regulatory framework in place in the United States at the time. And just a few months after probably the most critical episode of the crisis, the bankruptcy filing of Lehman Brothers on September 15, 2008, the government of Greece unchained a new ripple effect with the announcement that its fiscal deficit and public debt levels had been misreported throughout several years. The new Sovereign Debt Crisis (2010-2012) exposed the weaknesses of the Eurozone supervisory system, and Greece came very close to defaulting its sovereign bonds. The Greek sovereign bonds problem arose the attention of investors and rating agencies, and shortly thereafter, Ireland, Portugal and Spain were targeted by speculators, as their macroeconomic fundamentals were also deemed to be in poor shape (Santillán-Salgado et al. 2015).
The sequential outburst of these “twin crises” proved not only that financial regulation and supervisory bodies were inappropriate to monitor the participants in the global financial market, and limited in their ability to counterbalance the surge of serious threats to the international financial system. Governmental entities in charge of enforcing transparency and due diligence in the case of the United States, and compliance with the public finances targets of sovereign countries, in the case of the members of the European Union, were unable to anticipate the onslaught of savage speculation and bank failures that would follow the events described, forcing their governments to bail out numerous financial entities and non-financial corporations that were considered “too-big to fail”. An overwhelming and unexpected default of thousands of complex securitized bond issues and the limited cross-national coordination of the authorities to stop the extreme turbulence observed in the global financial market during that period staged an extraordinarily dangerous financial risk situation1.
The Global Financial Crisis affected Latin American countries less than most other geographical regions in virtue of the important modernization efforts and structural reforms implemented by the regional governments during the previous decade (although there is a wide dispersion in the timing of the Latin American structural reforms that initiated back in the 1970’s in Chile), and also because the international price of many of the commodities they export, including oil, metals, minerals and agricultural products, reached historically high levels well into the period of intense financial volatility, and until the last weeks of the Summer of 2008: and even when there was a generalized collapse of commodities prices during the next six months, there was a significant recovery towards January of 2009.
Almost two decades earlier, at the beginning of the 1990s, the most pressing macroeconomic problems affecting Latin American countries were: how to stabilize inflation, how to achieve fiscal discipline, and how to liberalize trade and liberalize the financial industry (Gonzalez and Kruger 2003). At that time, Latin America was considered a region affected by chronic inflationary problems and by general macroeconomic instability.
However, by the end of the 1990s, the macroeconomy of the region was totally different, and inflationary pressures were no longer an issue in most regional countries. The region governments’ preventive policies included the accumulation of foreign reserves as a buffer to sudden capital outflows, and fiscal policy was conducted with more responsibility than in the previous decades2.
The public finances had been significantly improved, including the massive reduction of the public sector ownership of all sorts of productive assets, through many successful privatization experiences. Domestic financial systems were strengthened by an expanded and improved quality capital base, by a systematic upgrading of regulatory and supervisory frameworks, and by better risk management practices.