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Monday, December 08, 2008

Stephen Fidler, "Economists warn on LatAm credit squeeze," Financial Times, December 4, 2008.

[Here is an issue that deserves to be on the table when we consider spending our way out of recession. David Goldman at Inner Workings calls it a Latin American bust due to s Treasury glut. As wealthy countries use up what little credit there is, those in Latin America--and probably Africa--will have difficulty financing their own recoveries. “The north is crowding out the emerging market economies by creating these big public sector deficits.” -jlt]

  In the absence of adequate international actions, beggar-thy-neighbour policy responses may be politically inevitable...

Huge volumes of US Treasury bonds issued as part of an effort to reverse an economic slump threaten to stop access to credit by Latin American governments facing financing needs of an estimated $250bn next year, a group of prominent economists from the region has warned.

The risk that Latin American and other emerging market borrowers may be “crowded out” from credit markets by a US fiscal deficit that could exceed $1,000bn next year has not been much emphasised in the scramble to save the US economy. But the economists said “powerful and innovative” new mechanisms were required to deal with the threat in order to direct money back into the region.

The group, known as the Latin American Shadow Financial Regulatory Committee (Claaf), includes former finance ministers and central bank governors, such as Roque Fernández, a former finance minister of Argentina, and Ruth de Krivoy, former Venezuelan central bank president. Angel Gurria, the head of the Organisation for Economic Co-operation and Development, sits on the panel as a guest.

  Unless credit found its way to the region, the economists said governments would be forced to choose between two unappetising alternatives: painful fiscal adjustment that would reinforce the downturn or distortive measures, such as import restrictions and capital controls.

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