Contagion in Latin America: An analysis of credit derivatives
by Jessica Beattie of Duke University
Introduction: The Asian currency crisis of late 1997 and Russian default of 1998 produced contagion effects in emerging markets throughout the world. Of the main emerging financial markets: Asia, Latin America and Russia, Latin America suffered the least from the ensuing international credit crunch. The crises in Asia, Russia and Brazil and their effects on economies across the world have brought attention to the phenomenon of international mobility in capital markets. One reason why Latin America experienced some insulation from speculative crises is that countries such as Mexico, Brazil, Argentina and Chile instituted fiscal and financial reforms in response to the Mexican crisis of 1994 and the Latin American debt crisis of the 1980s. The Argentine Convertibility Plan and Brazilian Real Plan are two notable examples. Latin America did suffer some real effects of the Asian and Russian crises spillovers, including currency pressures and strong reversals in private capital flows. This paper will spotlight and compare the contagion effects in Brazil and Argentina as a proxy for the Latin American market. To establish an appropriate context for comparison, this paper will draw on documentation from the International Monetary Fund to identify differences in fiscal policies of Brazil and Argentina and will explain why Brazil experienced significantly stronger speculative pressure than Argentina.