Southern discomfort

The news from the Latin nations of South America in recent months has not been comforting.

The International Monetary Fund (IMF) recently lent Brazil US$30 billion to meet immediate debt repayments. Faced with increasing interest rates, the government is having difficulty meeting immediate payments on its debt, and fears of default are pushing those interest rates higher.

Brazil has followed the free-market prescription for its private sector, and been fiscally responsible in its public finances, for nearly a decade. From hyperinflation and oversized debt, it has found its way to moderate inflation and respectable growth rates, and pushed its debt, as a fraction of gross domestic product, down to manageable levels. Its budget is in operating surplus — though debt service charges still bring it into deficit.

All this would be imperilled by a default. Worse, Brazil is a significant market for other Latin American countries, whose export economies could suffer if Brazil’s economy worsens.

The IMF has also made close to US$3 billion available to Uruguay, where banks were closed by government order at the end of July and automatic tellers shut down for four days. The banks, many of them depleted by withdrawals Argentine depositors had made following that country’s currency crisis last December, have seen deposits fall by almost a third since the beginning of the year. There was some looting, but no replay of the violence that struck Argentina at the end of last year.

The IMF credit replaces an emergency loan of US$1.5 billion made by the United States earlier this month, which allowed the Uruguayan central bank to guarantee solvency in the commercial banking system, and let the banks reopen.

A further US$200 million credit line went to Paraguay, where the economy is staggering from the results of the Argentine mess. The government imposed a state of emergency in mid-July after protests against its free-market policies turned violent.

Add to that the last few months of political turmoil in Venezuela and Colombia, and South America’s rise to international respectability through the 1990s appears to be in peril. Only Chile seems to have escaped both economic and political unrest; only Ecuador, which had its own economic crisis in 1999, is seeing slow improvement. And — as inevitably they do — left-wing politicians are using the crises to discredit free-market economic solutions. Thus there is reason to fear that the industrialized world may see valuable friends slip away.

Stable economies and governments in South America are vitally important to the Canadian mining industry. From juniors with small grassroots exploration projects to giants such as Falconbridge and Teck, Canadian companies have a vital interest in the continent. So also do other mining companies the world over, and the continent is itself the home of two heavyweight international metal producers, Chile’s Codelco and Brazil’s Companhia Vale do Rio Doce.

Moreover, it is disproportionately the home of the biggest mining projects, such as the large Andean base metal mines. That is why the present economic crises could have grave consequences for the future of the mining industry. If the present problems slide into social chaos, a region that had finally shaken its reputation for sovereign risk could find itself back in the bad old days very quickly.

An increase in sovereign risk is bad anywhere and anytime; in South America, this time, the mining industry will be that much more exposed to it. The good years drew more and more private-sector investment to the continent, and that money is now there in the form of fixed assets.

So far, the principal economic crises have befallen Argentina and Uruguay, so (with a few exceptions) the mining industry has not seen real difficulties yet. Certainly operators could expect governments faced with a crisis to be very supportive of any foreign-exchange earner, and the cost advantage conferred by a falling currency would be a boon in the short term. But once it came time to refurbish a mill or replace a fleet of shovels or load-haul machines, the effect of an economic crisis would be very telling for any operator that had to hold local currency; and then the government could be of little help.

If Brazil goes into default, one of the primary sufferers will be its own commercial banks, who own a large proportion of public debt. If they are forced to take a haircut on bonds they hold — and forecasts of the potential writedown range up to 40% — then the slightest bad news could cause nervous depositors to make a run on bank assets. If a run happens, we will see a replay of Argentina and Uruguay, complete with bank machines that don’t go beep-beep, bank accounts that exist behind a locked door, and people putting bricks through grocery-store windows.

This is what the IMF is supposed to be for; and it will be important for the First World to give fiscally responsible governments in South America the help they will need to get out from under the debt crisis. This is not a time to cry about bailouts. The continent’s economic and political stability, and its renewed prosperity, are very much in our interest.