ISTP EUROIDIOMAS

PROGRAMA DE TRADUCCIÓN

THE USA FINANCIAL CRISIS AND ITS REPERCUSSIONS IN

LATIN AMERICA

Curso:
Panorama de la Cultura Norteamericana

Profesora:
Sandra Benites

Alumnas:
Cyntia Sofía Adrianzén Segovia
Roxana Benaducci Herrera

Ciclo:
V - diurno

Lima, Perú
2009
 THE USA FINANCIAL CRISIS AND ITS REPERCUSSIONS IN
LATIN AMERICA

It is an ongoing financial crisis triggered by a dramatic rise in mortgage

delinquencies and foreclosures in the United States, with major adverse
consequences for banks and financial markets around the globe. The crisis,
which has its roots in the closing years of the 20th century, became apparent in
2007 and has exposed pervasive weaknesses in financial industry regulation
and the global financial system.

Many USA mortgages issued in recent years are subprime, meaning that little
or no downpayment was made, and that they were issued to households with
low incomes and assets, and with troubled credit histories. When USA house
prices began to decline in 2006-07, mortgage delinquencies soared, and
securities backed with subprime mortgages, widely held by financial firms, lost
most of their value. The result has been a large decline in the capital of many
banks and USA government sponsored enterprises, tightening credit around the
world.

The crisis began with the bursting of the United States housing bubble and high
default rates on "subprime" and adjustable rate mortgages (ARM), beginning in
approximately 2005–2006.

Causes of the USA Financial Crisis

The reasons proposed for this crisis is varied and complex. The crisis can be
attributed to a number of factors pervasive in both housing and credit markets,
factors which emerged over a number of years.

Causes proposed include:

 The inability of homeowners to make their mortgage payments.

 Poor judgment by borrowers and/or lenders.

 Speculation and overbuilding during the boom period.

  Risky mortgage products.

 High personal and corporate debt levels.

 Financial products that distributed and perhaps concealed the risk of

mortgage default.

 Monetary policy.

 And government regulation (or the lack thereof).Ultimately, though, moral

hazard lay at the core of many of the causes.

Consequences of the USA Financial Crisis

On the heels of the near bankruptcy of a major insurance company and the
effective end of all major US investment banks, financial markets around the
world sustained severe losses in the first two weeks of October, 2008,
accelerating the downward trend that started at the beginning of the year.

As a consequence, from New York to Moscow, and London to Sao Paulo,

equity prices have fallen sharply – with the major stock indices of the G7 and
BRICs losing nearly half of their value since the beginning of the year. This has
seriously damaged banks’ balance sheets and restricted their lending capacity.

With the cost of short-term credit rising dramatically and liquidity drying up,
these events have been dubbed the worst financial meltdown since the Great
Depression in 1930s. More importantly, the shock waves from the US financial
market have spread throughout the globe, with many countries on the brink of
recession.

The U.S. government spent (or committed) more than a trillion dollars in trying
to prevent the collapse of U.S. financial markets. Following the bailout of Bear
Sterns, AIG, Freddie Mac, and Fannie Mae, the U.S. Congress approved the
Emergency Economic Stabilization Act to give authority to the U.S. Treasury to
buy troubled mortgages and mortgage-related securities. However, the original
package (US$ 700 billion) has been revised to include a recapitalization of
banks, federal guarantees on new bank debt for three years and FDIC
insurance for non-interest bearing accounts. If the troubled assets (MBS)
bought by the Treasury are later sold at a fair market value, this could ultimately
be a profitable transaction for the U.S. government. And, if the Treasury finds
the right buyers for the banks that it partially owns, then it could also end up
making money.

In Europe, the Bank of England pledged US$ 87 billion in direct support to the
country’s major financial institutions. British Prime Minister Gordon Brown’s
rescue package which involves direct capitalization and guarantee of inter-bank
lending has been adopted by other major European countries and the U.S.
government (as mirrored by the new revisions adopted by the U.S. Treasury).
Furthermore, central banks around the world (Fed, ECB, Canada, Sweden,
Switzerland, and China) introduced coordinated interest rate cuts to lower the
cost of borrowing, with the aim of restoring confidence in the global economy.

Those Who Diversify: Chile

At a G-7 meeting in early February, finance ministers maintained an anti-tariff
rhetoric and pledged to remain “committed to avoiding protectionist measures.”
Accordingly, Timothy Geithner, U.S. Treasury Secretary, stated, “all countries
need to sustain a commitment to open trade and unfettered investment policies
which are essential to economic growth.” While some left-leaning governments
in South America are erecting trade barriers, Peru and Chile are robustly
pursuing their free trade model, with a free trade agreement (FTA) between the
two nations. Moreover, in conjunction with this agreement, the two countries
continue to diversify their trading partnerships. Chile has signed comprehensive
FTAs with the US, Canada, the EU, South Korea, Japan, Central America and
Mexico.

Peru
Meanwhile, its trade agreement with Australia went into effect on March 6,
2009.
According to Financial Times, Peru’s President Alan Garcia signed FTAs with
Canada and Singapore in 2008 and expects the pacts to come into effect this
month. Peru’s trade deal with China should also take effect within the next few
months, and agreements with South Korea, Central America, and Japan are
currently under negotiation. Their advocates insist that Chile and Peru’s
economies have benefited enormously from free trade, but a number of area
nations and various leftist analysts are moving away from an unalloyed neo-
liberal-oriented enthusiasm for this type of approach.

Those Who Stimulate: Brazil

Brazil, Colombia, and Chile are also implementing Keynesian national stimulus
packages, though on a much smaller scale when compared to that of the U.S.
Brasilia’s $281 billion deal is focused primarily on supporting the energy and
transportation sectors of South America’s largest economy, according to Prabir
De of Indian Express Finance. In December 2008, Brazil also announced 2009
tax cuts of 8.4 billion reais (US $3.6 billion), directed primarily at the obligations
borne consumers. According to Brazzil Mag, the measure also included a tax
reduction provided on the Tax on Industrialized products for the Brazilian auto
industry until March 31, 2009. The carmakers agreed to transfer the tax cuts to
reduce the prices charged to their customers, making prices for their vehicles
considerably cheaper.

Colombia
The Brazilians are not the only South Americans attempting to jump start their
economy. Colombia’s plan represents the largest annual infrastructure spending
in its history. The 55 trillion peso (US$22 billion) stimulus plan includes over 100
electricity, transportation, oil, and sanitation projects, according to Latin
Finance. Colombia’s economy is predicted to grow less than 2 percent this year,
and the stimulus is expected to allow it to weather the storm, according to
Carolina Rentaria, head of Colombia’s National Planning Department.

Chile
Chile will also break its record for economic stimulus spending this year, as
President Michelle Bachelet announced a $4 billion scenario to curtail the
effects of the global recession on January 6, 2009. The primary aim of the
stimulus is to create the conditions for economic growth as well as to generate
100,000 new jobs.. Santiago is also mulling over temporarily cutting the 19
percent value-added tax (VAT) and adding a one-time payment to low-income
families as a third economic stimulus, according to a Reuters report.

Although stimulus packages do not include explicit protectionist mandates, such

as tariffs and anti-dumping measures, several developing nations have argued
that fiscal stimulants and bailouts (especially to large bank and auto bailouts in
the U.S. and Europe) may be having an adverse effect on international trade. At
a WTO Trade Policy Review Body meeting, developing countries were
concerned about large subsidies being made to individual industries, such as
U.S. steel fabricators. At the same meeting, Brazilian Ambassador Roberto
Azevedo told journalists that protectionism includes more than just controlling
imports and raising tariffs. It also includes subsidies and large stimulus
packages, which are typically not available to developing nations with limited
resources. Azevedo argued that industrialized nations “are increasing the
capacity of their industry to compete in a way that developing countries cannot.”
Since developing nations do not have the funds to implement such large scale
supportive measures, their only alternative is raising tariffs.

Those Who Tariff: Argentina

As part of their economic defense strategy, Argentina, Ecuador, and Paraguay
have all raised tariffs to protect their domestic markets.. Buenos Aires in turn
was criticized by Brazil, China and Paraguay for its new system of licensing and
minimum pricing that it has applied to over 1,000 imports in recent months. As a
result of Argentina’s restrictions and its trade deficit with Brazil, the Paraguayan
government announced on March 1, that it will apply certain tariffs to imports
from Argentina and Brazil in order to protect its local industry. Paraguay’s
Finance Minister Dionisio Borda argued that Asunción’s treatment of
Argentinean and Brazilian imports would be similar to their respective treatment
of Paraguayan imports. Borda stated, “We, too, are going to apply the same
measures they have adopted.” He assured the interested parties that the
measures would “be temporary” and serve as part of the economic recovery
plan. Paraguay is also implementing its own “Buy National” campaign similar to
the U.S. “Buy American” provision, which will give local Paraguayan goods and
services a 70 percent preference, according to Borda.
Ecuador
President Rafael Correa of Ecuador is essentially forcing citizens to “Buy
Ecuadoran” products with his newly imposed import restrictions. According to a
WTO press release, Quito raised tariffs between 5 and 20 percent on 940
products, including perfume, liquor, shoes, shampoo, grapes, butter, turkey,
caramels, cell phones, eyeglasses, sailboats, building materials and transport
equipment. As prices of imported goods drastically increased, some argue that
buying domestic is now the only practical choice for most Ecuadoran
consumers. Correa, however, predicts that the tariffs will have only a minor
impact on citizens, because “the poor don’t consume perfumes, liquor and
chocolates.”

Ecuador’s new tariffs have been criticized as one of the world’s most
protectionist responses to the global economic crisis. Gary Hufbauer, of the
conservative Peterson Institute for International Economics, argues that no
other country has harsher restrictions on imports. Correa said drastic measures
were necessary to prevent Ecuador’s economy from crumbling, as petroleum
prices declined and remittances and earnings on foreign investment plunged. It
should be noted that Ecuador is extremely vulnerable in the current situation
because it adopted the U.S. dollar as its official currency in 2000 after the
country was beset by a withering banking crisis. This prevents Quito from
printing its own money. Ultimately, this could prove to be problematic if
Ecuador’s trade deficit widens because its economy could collapse due to a
drainage of U.S. dollars. Correa hopes that the restrictions will keep $1.46
billion from exiting Ecuador’s $50 billion economy, according to Jeanneth
Valdivieso and Frank Bajak of the Associated Press. Some economists are also
calling for the creation of a national currency to replace or supplement the
dollar, in order for Ecuador to maintain a more sound monetary policy.

Paraguay
Although tariffs are seen as short term solutions, they can have long term
consequences. For instance, some economists argue that tariffs and price
controls have the potential to trigger global “trade wars,” as witnessed in
Paraguay’s response to Argentina’s imposed tariffs. They also agree that
protectionist measures, such as Smoot-Hawley Tariff Act, prolonged the Great
Depression longer than may have been necessary. Thus, newly imposed tariffs
should only be counted on to provide temporary relief (much like an economic
stimulus), and they should be re-evaluated as the beginning signs of a recovery
appear.

As the economic crisis continues to globalize, South American nations are

pursuing various trade deals, implementing economic stimulus packages, and
imposing new tariffs in response. All of these individual national efforts seek to
soften the blow delivered by the downturn, but it is unlikely that they alone will
solve the problem. Latin American stocks have plummeted and the International
Labor Organization has issued a warning that 2.4 million Latin Americans
shortly could join the ranks of the unemployed this year as a result of the
incessant crisis. Nevertheless, the catastrophe extends far beyond Latin
America and the entire Western Hemisphere, and thus there is dire need for
global collective action. The G-20 summit in London that begins in a few days,
offers a good deal of potential to develop a concerted response. At this point,
the only thing the world’s economies seem to agree on is that the financial
regulatory system needs to be reformed, but exactly to what extent, continues
to be a serious concern. Developing nations want greater governance over the
operation of the international financial institutions, such as the World Bank and
the International Monetary Fund (IMF). They also agree that the IMF needs to
be rendered more flexible in terms of the conditionalities it imposes on countries
receiving financial aid.

Developing nations also fear that they will be “crowded out” by developed
nations in terms of access to loans and investment capital. Latin American
finance ministers have called for a recapitalization of the Inter-American
Development Bank (IDB), currently the largest lender in Latin America for major
development projects. The World Bank is proposing a Vulnerability Fund that
would similarly focus on infrastructure projects and maintaining adequate
financing of schools, health care, and loans for small businesses for low income
elements of the population.

The U.S. is also calling for greater financial regulation, while simultaneously
calling on the EU to engage in greater government spending and in economic
stimulus programs. The EU, much like Latin America, feels as though it is being
forced to clean up a mess that originated mainly in the U.S. There is a fear that
the G-20 summit will be spoiled due to delegates bringing with them contrasting
objectives and with only 24 hours to rush through the chaotic agenda. One can
only hope that the world powers listen to the worthy voices of developing
nations and work together to overcome the global crisis. If the former don’t, the
real problems will really begin.
 SOURCES

http://en.wikipedia.org/wiki/Subprime_mortgage_crisis

Actual_Crisis_Financiera_consecuencias, _medidas_y tendencias

www.coha.org