Latin American Risk

Fernando Fernández. Professor. IE Business School

4 March 2010

Latin America is advancing, but there are still irresponsible leaders in Venezuela and Argentina that are also affecting oil-dependent satellite states.

It´s been a long time since we talked about Latin American risk. We´ve been busy applauding the region´s strength and how it has managed to resist the crisis. But some countries are condemned to suicide by leaders who insist on prolonging their citizens´ misery. Fortunately, today most Latin American countries have more consolidated economies that are less dependent on foreign saving, with better supervised and more competitive financial systems. Irresponsible managers are the exception rather than the rule, said exceptions being limited to two large countries, Venezuela and Argentina, and a few satellite states that depend on Venezuela’s oil to finance their revolutions.

But now Venezuela and Argentina’s need for liquidity has finally come to a head.

Venezuela’s oil is no longer enough to feed the delusions of grandeur of a president that has managed to fritter away the proceeds of the greatest oil boom in the country’s history. Now there is a shortage and nobody is producing anything. Devaluation was not the solution, being complicated enough without a stabilisation plan to make it viable. There was a return to controlled exchange rates, to a multiple-rate regime, to systematic corruption and cronyism. The country knows full well what is going on because it has already been through it many times. And as this won´t be enough, there will be confiscations and businesses will be expropriated. Until the whole thing implodes. In Argentina, it may be possible to keep the lid on the conflict between the president of the nation and the central bank. There is something far more important than the US$6,569 million in reserve currency, and that is the credibility of a country whose neighbours, Brazil and Chile, are shining examples of the fact that good economic policies reap rewards. Once again, Peronism is the main enemy, while the determination to stay in power will strike the fatal blow. It is not how the currency reserves are used that is the problem here, but the fact that the independence of Argentina’s monetary policy is at stake, and the possible return of hyperinflation, or “híper” as the Argentineans call it.

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