Latin America Plays Down Debt Concerns

Latin America trembled Friday after tiny Ecuador warned it was having trouble paying its foreign debt and Argentina faced a debt downgrade, but governments throughout the region took steps to head off yet another emerging-market debt crisis.

The three Latin American economic powerhouses--Brazil, Mexico and Argentina--sought to reassure anxious investors that their economies are basically sound and not in danger of falling prey to the fundamental problems plaguing Ecuador.

On Thursday, Ecuador’s government said it may defer payment on $94 million in bond interest due Aug. 31 and it floated a debt-restructuring plan by the International Monetary Fund.

If the bonds go into default, Ecuador would become the first country to take that route with its “Brady” bond debt, issued by developing countries as part of a U.S.-backed restructuring of commercial bank loans. The Brady plan was a response to the Latin American debt crisis of the 1980s.

A year ago, Russia’s default on domestic debt sparked an emerging-markets crisis hot on the heels of the debacle in Asia.

Although Ecuador’s debt is not as widely held as Russia’s, the news came as a blow to investor confidence in Latin America and added to the burden on the region’s three largest economies.

Market opinion was divided on whether Ecuador’s crisis would have a major impact on other emerging markets.

“This is significant for the weaker credits within emerging markets, and this includes Brazil. Suddenly this is yet another piece of news to remove non-special investors,” said Freddy Thomsen, economist at ING Baring in Buenos Aires.

“You put it all together and if you’re not a specialist investor, you’re saying: ‘What is going on down there? Let me just stay out,’ ” Thomsen said.

Brazil, whose devaluation in January sent more shock waves across Latin America and plunged its neighbors deeper into recession, saw its currency, the real, dip 2.9% to 1.99 reals to the dollar.

But the real rebounded after Brazil sold dollar-linked debt, offering investors protection against further falls in the currency. The real gained 2.1% to close at 1.89 reals to the dollar from 1.93 on Thursday.

Argentine stocks and bonds slumped after Moody’s Investor Services placed its debt and currency ratings under review for a possible downgrade.

But Argentine Finance Undersecretary Miguel Kiguel said, “I think [Ecuador] will have a short-term effect . . . but I don’t think it will affect us in the longer term.”

Mexico’s currency and stock markets slumped on concerns over Ecuador, but its government put a brave face on the situation.

“Mexico’s economy is progressing on solid fundamentals despite the international challenges in a tough 1998 presented by Asia, Russia, Brazil and oil prices,” a Finance Ministry spokesman said.

Ecuador saw its currency go on a roller-coaster ride, dropping 2.1% at Friday’s open and closing up 3.1% at 11,100 sucres to the dollar after a Central Bank official tried to quell fears of a debt deferral.