The emerging-markets crisis is supposed to be over, but the signals from Latin America suggested otherwise Monday as rumors of a currency devaluation in Argentina accelerated across the region and sent stocks down sharply.
Economists insisted that a devaluation and an abandonment by Argentina of the peso's peg to the U.S. dollar are unlikely, but several warning signs--including provocative comments last week by financier George Soros--have rattled much of Latin America.
Soros said Friday that Argentina's money was overvalued, and his backtracking Monday failed to reassure markets. The leading Merval index of stocks fell 2.7% to 497.42, continuing a decline that had shaved 13% off the market in the previous two weeks.
In Mexico, the IPC stock index tumbled 2.5%, while Brazil's main index fell 4.9% and Venezuela's lost 1.4%.
Soros' comments were the latest in a series of events stoking fears that the government might abandon the peso's "convertibility" to the dollar, a policy in effect since 1991.
By law, Argentina can issue only one peso for each dollar it holds in reserve, a self-imposed discipline enforced by a currency board that has been partially credited for Argentina's economic recovery in recent years.
But Argentina's peso has been on crisis watch ever since the January devaluation and currency crisis in Brazil, which robbed Brazilians of 20% of their purchasing power. That has sent sales of Argentine grain, cars, livestock and other exports plummeting in Brazil, the customer for one-third of all Argentine exports.
Ironically, Brazil is beginning to pull itself away from the brink of collapse and toward economic growth as Argentina finds itself mired in its third straight quarter of recession. Total output of Argentina's economy probably contracted 4% over the three months ended March 31, compared with last year, said Salomon Smith Barney market strategist Brian Gendreau.
"You could say that Argentina has been hit harder by the Brazilian crisis than Brazil has," Gendreau said.
The legislature's failure two weeks ago to pass a $1-billion cut in education spending put forward by President Carlos Menem, raised fresh fears that Argentina might be losing fiscal discipline. Still, Argentina's projected fiscal deficit of 1.7% of economic output is puny compared with the 8% to 10% expected in Brazil this year.
