Volume 44, Number 173,
April-June 2013
Latin America. Between Financialization
and Productive Finance
Roberto Soto
Introduction ( ...continuation )

The broad presence of financial difficulties on the eve of a crisis and even in times of high market illiquidity encouraged and gave rise to the explosive growth of derivatives markets,1 as their nature is to exist in a self-regulated, opaque, over-leveraged, speculative and highly risky market where the majority of operations are carried out in tax shelters. In other words, we are talking about a market (both organized and otc) that went from a value of 3.8 trillion dollars in 1989 to 712 trillion dollars by March of 2012, which is more than 10 times the global product. They have been a factor in the bankruptcies of large companies such as Enron (United States) at the beginning of the twenty-first century, regions such as Southeast Asia at the end of the twentieth century and the Mexican crisis in 1994, among other cases.

To some extent (although not the only factor), dfibrought about the 2007-09 crisis in the United States (the mortgage crisis), which led to governmental intervention in rescuing Citigroup, Fannie Mae and Freddie Mac, the bankruptcy of Lehman Brothers, the acquisition of Merrill Lynch and Bear Stearns by Bank of America and jp Morgan Chase, respectively, and the rescue of aig by the Federal Reserve. The most recent crises are playing out in Europe, in Iceland, Ireland, Greece, Spain, Italy and Portugal, among other countries. All of these have a common denominator: governments have applied a series of contractionary measures, such as reducing public spending (education, health, housing, subsidies, etc.), increasing taxes (on income and consumption) and transforming private debt into public debt.

During these crises, which have been more frequent and profound, the resources that have been employed are given in Table 1, describing the most recent rescues, specifically those in Spain and Greece. We are experiencing a major paradox: earnings are privatized while losses are socialized. In 2011, the imf requested an increase in the quota of member countries in order to increase funds destined for the rescue of other nations and face problems resulting from the crisis (especially in the financial system). Mexico thus contributed nearly 14 billion dollars. Second paradox: the South lending to the North.

Why did this financial tsunami occur? What impacts does the financialization process have on underdeveloped nations such as those in Latin America? What are the limits of productive finance? These are some of the questions addressed in this article, whose objective is to analyze how financial globalization has led to a series of transformations to financial systems – especially in Latin America – that have modified the functional form of both the public and private banking systems, affecting the financing process for productive activities. This article is divided into three sections: the first studies the use of financial instruments to reach financial objectives proposed by private companies and public bodies, which has altered the traditional functioning of both groups. The second analyzes the financialization process that has been adapted by both public and private entities. The final section describes some of the fundamental modifications to the financial system in Latin America due to deregulation, which has also modified the functional pattern of the financial system.

1 Those operating the derivatives market (orthodox vision), such as, primarily, institutional investors and banks, state that dfiwere created to reduce financial risks and increase financial efficiency. They say that the price of these instruments depends on future trends for the underlying reference value. Other operators, analysts and mainly academics (heterodox vision) believe that derivatives serve as the means to carry out speculation, causing difficulty for financial and monetary institutions seeking to achieve their objectives (Soto, 2010).

Published in Mexico, 2012-2017 © D.R. Universidad Nacional Autónoma de México (UNAM).
PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 49, Number 192, January-March is a quarterly publication by the Universidad Nacional Autónoma de México, Ciudad Universitaria, Coyoacán, CP 04510, México, D.F. by Instituto de Investigaciones Económicas, Circuito Mario de la Cueva, Ciudad Universitaria, Coyoacán,
CP 04510, México, D.F. Tel (52 55) 56 23 01 05 and (52 55) 56 24 23 39, fax (52 55) 56 23 00 97, www.probdes.iiec.unam.mx, revprode@unam.mx. Journal Editor: Alicia Girón González. Reservation of rights to exclusive use of the title: 04-2012-070613560300-203, ISSN: pending. Person responsible for the latest update of this issue: Minerva García, Circuito Maestro Mario de la Cueva s/n, Ciudad Universitaria, Coyoacán, CP 04510, México D.F., latest update: Feb 23th, 2018.
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