Markets in Argentina, Brazil Fall Amid Fears

New political and energy worries weighing on Argentina and Brazil sent both countries’ stock markets reeling Monday as fears of renewed economic instability reverberated around the hemisphere. The effect of the U.S. economic slowdown also is taking an increasing toll.

Brazil’s main stock index, the Bovespa, fell 401.13 points, or 2.6%, and Argentina’s fell 8.58 points, or 1.9%, as Standard & Poor’s rating agency said it was considering downgrading Argentina’s credit rating over fears the country might not make payments on $124 billion in foreign debt.

The neighboring countries have closely intertwined economies and are each other’s largest trading partners. Brazil’s 1999 devaluation caused serious repercussions in Argentina’s trade. Now the widening political unrest in Argentina is roiling Brazil’s stocks and currency, causing analysts to openly speak of a possible financial contagion.

Meanwhile, Mexico’s main share index rallied 1% to 5,935.22 Monday and still is up 5% year to date. The Mexican market rose 15% in January and has fallen back since but still has held up better than markets in Brazil and Argentina.

Late Monday, Argentine Economy Minister Ricardo Lopez Murphy resigned after only two weeks in the post, Reuters reported, a victim of political fallout from a controversial budget-cutting plan he and President Fernando de la Rua are pushing to save the government $4.6 billion over two years. Former Economy Minister Domingo Cavallo was named as his replacement. Also late Monday, De la Rua ratified a plan to peg the peso to the U.S. dollar and said Argentina would honor International Monetry Fund deficit targets.

Investors are worried that the austerity package will fail, leaving the government unable to meet its debt obligations. Argentina’s government bonds plummeted to yield almost 9 percentage points more than comparable U.S. Treasury securities.

“If there is a major crisis in Argentina, we will see more pressure on the [Brazilian] real, and the central bank may have to raise rates, which would hurt growth, and Brazilian companies would not make as much money,” said Mario Mesquita, chief economist at ABN Amro in Sao Paulo, Brazil.

Adding to the pessimism, Brazil’s offshore oil rig disaster last week, which killed 10 people, raised the possibility of a wider trade deficit for Latin America’s biggest economy, jeopardizing the country’s ambitious plan to be energy self-sufficient in five years.

Rescue teams worked Monday to save the rig from sinking off Rio de Janeiro, but it has been losing 80,000 barrels a day--or about 7% of Brazil’s oil output--and could force Brazil to import an additional $500 million worth of petroleum this year, adding to its trade imbalance.

Brazil’s trade imbalance has been a source of worry for its economic architects, especially since the 1999 devaluation of the real failed to produce a huge trade surplus as hoped. Brazil posted a $700-million deficit in 2000.

Although the real gained slightly Monday to close at 2.118 to the dollar, it has weakened 8% since the first of the year, largely because of fallout from its neighbor’s problems, Mesquita said.

Brazil’s central bank disclosed Monday that it intervened to prop up the sliding currency by selling two lots of dollar-indexed bonds in emergency auctions. The actions came after the real closed Friday at 2.128 per dollar, its second-lowest close since the currency’s introduction in 1994. Brazil’s stock market jumped 16% in January, while Argentina’s surged 28%, as both markets rallied amid Wall Street’s rebound and the Federal Reserve’s interest rate cuts Jan. 3 and Jan. 31. But both markets have tumbled since. Year to date the Bovespa index is down 2.8%, although the Merval still is up 4.2%.

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Spillover Effect

Brazil’s stock market, which rallied sharply in January, has been hammered in recent days by concerns about weakness in the nation’s currency and by Argentina’s latest economic woes.

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Bovespa index on the Sao Paulo stock market, weekly closes and latest

Monday: 14,835.90

Source: Bloomberg News