Volume 44, Number 175,
October-December 2013
The Implications of the Global Financial
and Economic Crisis in Latin America
Susana Nudelsman
The Onset of the Crisis in the Region ( ...continuation )

Although the global financial environment was in a particularly grave state following the Lehman Brothers debacle in September 2008, there was a certain initial impression that Latin America might experience something different than the external conditions would indicate. However, this idea soon disappeared as the financial and economic turmoil spread throughout the world. It was of course impossible for the region to have remained immune to the external commotion, but the intensity of the effects varied depending on each national context. It is notable that although the crisis originated in the financial sector of advanced nations, Latin American economies were able to face these difficulties without panic and avoiding financial collapses. The capacity of the region to deal with extremely serious external issues without leading to a systemic financial crisis is a notable phenomenon in the history of the region. Likewise, the desire of the international community to provide liquidity to emerging markets at the maximum peak of the crisis is no small aspect in terms of the performance of the region. Bagehot's teachings with respect to lenders of last resort were put into full use (idb, 2010).

Channels by Which the Crisis was Transmitted

As has been commented, Latin American countries were not spared the difficulties experienced in global markets. In this case, on average, the reduction in remittances had moderate repercussions, but for a few small economies, the effects were drastic. With the Lehman Brothers debacle, global financial conditions worsened. However, the financial shock felt in the region was less severe than in previous episodes of crisis. By contrast, the strength of the effects of the global crisis can be explained by the strength of commercial repercussions (Ocampo, 2009).

The two main channels through which the crisis was transmitted to Latin American economies were impairment to the prices of raw materials and a reduction in global commercial volumes. In the developed world, a drop in exports was fundamentally due to a decline in the volume of exported manufactures. In the developing world, it was fundamentally due to a decline in the prices of raw materials. In this context, Latin America experienced a significant commercial deficit between the end of 2008 and the beginning of 2009. With the partial recovery of the prices of some raw materials, the inclusion of these products in investment portfolios, the gradual reestablishment of global capital flows and recovery in the levels of economic activity in various developed and developing countries, commercial flows in Latin America began to recover starting in the first quarter of 2009. The spike in exports in the region was concentrated in South America due to a high demand for raw materials in China. By contrast, this increase was more moderate in Mexico and Central America (eclac, 2010).

Figure 3. The Value of Global Exports (First Half 2008-2010)

Source: José Antonio Ocampo, based on data from the Office of Economic Policy Analysis of the Netherlands,
Ensayos Económicos, num. 61-62, the Central Bank of the Republic of Argentina.

With respect to financial channels, the recent global crisis demonstrated specific characteristics. The epicenter of the crisis effectively took place in the financial sectors of advanced economies, while the significant reduction in the external public debt of Latin America gave its governments a greater margin for maneuver and stabilized private markets. Vulnerabilities were more related to financial innovation than to macroeconomic instability or the fragility of the banking sector. The financial effects of the global crisis in the region began in mid-2007, but increased significantly in September 2008. The deleveraging of the global banking system and undermined appetite for risk among investors led to a decrease in demand for the financial assets of emerging economies and an abrupt depreciation of their currencies. The reversal of gross capital flows in combination with strict financial conditions reduced the liquidity of local and foreign money markets. In this context, the energetic efforts of central banks to provide liquidity to these markets played a fundamental role. The partial repatriation of external assets accumulated b residents in some countries and the progress achieved in local debt markets in developing countries, especially for government bonds, would also contribute to maintaining the financial situation. However, episodes of instability in the local monetary and currency markets in Brazil and Mexico would reveal that the economies of the region were not entirely immune to the difficulties brought on by the global collapse (Jara, Moreno and Tovar, 2009).

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PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 49, Number 194 July-September 2018 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,
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