The USA Financial Crisis

and its repercussions in

Latin America
Integrantes: Cyntia Adrianzén
Roxana Benaducci
 The USA Financial Crisis
 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.

 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.
The USA Financial Crisis
 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 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 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.
Causes of the USA Financial Crisis
 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).

 Consequences
 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.
 Consequences
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.
 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.
The G-20 meeting was set in London,
the outlook for Latin American
growth in 2009 is grim, as the tempo
of foreign direct investment ( FDI)
and loans stand-by credits and
development funds plummet, the
demand for commodities diminish,
and foreign remittances plunge .
Pamela Cox, The World Bank vice
president for Latin America and the
Caribbean, is forecasting 0.3 percent
growth for Latin America this year.
 Some Latin America's banking systems may be
strong enough to weather the storm because
many have not invested significantly in the US
market and their domestic financial markets are
not as developed as those of other Western
countries.
 Restrictions on credit may prove to be the most
immediate risk for the region. n addition, the fact
that the region’s financial markets are small to
begin with suggests a significant reduction in
investment can be anticipated for next year.
 Nations that are relatively more
linked to other regions, like
Argentina, Peru, and Brazil, will see a
delayed impact, as long as China's
growth remains robust.
 Those who diversify: Peru

 Countries most closely linked with the U.S.

economy will be hit the hardest.
 South American nations like Peru have diversified
their bilateral trade partners, , may be less
impacted by the global recession.
 Regional trade agreements could also help to
soften the blow on the continent. Nonetheless,
much of South America is now experiencing a
recession, and the debate on how to most
effectively respond to it varies widely among
economists.
 Trade agreement with Australia went into
effect on March 6, 2009.
 FTAs with Canada and Singapore.

 Peru’s trade deal with China should also

take effect within the next few months.

 Agreements with South

Korea, Central America,

and Japan are currently
under negotiation.
 Those Who Diversify: Chile
 Maintained an anti-tariff rhetoric and
pledged to remain “committed to avoiding
protectionist measures.”
 Chile is erecting trade barriers, they are
pursuing their free trade model, with a
free trade agreement.
 Chile has signed FTAs with
 the US, Canada, the EU,
 South Korea, Japan,
 Central America and Mexico.
 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.
 Those Who Stimulate: Brazil
 Brasil is implementing national stimulus
packages.
 Brazil also announced 2009 tax cuts of 8.4 billion
reais (US $3.6 billion), directed primarily at the
obligations borne consumers.
 The measure also included a tax reduction
provided on the Tax on Industrialized
products for the Brazilian auto
industry, making prices for
their vehicles considerably
cheaper.
 Colombia
 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.
 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.
 Those who tariff: Argentina
 Raised tariffs to protect their domestic
markets.
 Argentina imposed tariffs on a variety of
goods.
 new system of licensing and minimum
pricing that it has applied to over 1,000
imports.
 Those who tariff: Paraguay
 Apply certain tariffs to imports from
Argentina and Brazil in order to protect its
local industry.
 Measures would “be temporary” and
serve as part of the economic recovery
plan.
 “Buy National” campaign similar to the
U.S.
 Those who tariff: Ecuador
 Force citizens to “Buy Ecuadoran” products with
his newly imposed import restrictions.
 Quito raised tariffs between 5 and 20 percent on
940 products.
 Ecuador’s new tariffs have been criticized as
one of the world’s most protectionist
responses to the global economic crisis,
situation because it adopted the U.S.
dollar as its official currency in 2000
after the country was beset by a
withering banking crisis.
 A Global Solution to a Global
problem
 American nations are pursuing
various trade deals, implementing
economic stimulus packages,
and imposing new tariffs in
response.
 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.
 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 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 world powers must listen to the
worthy voices of developing nations and
work together to overcome the global
crisis.