In a blog this week, Nicolas Eyzaguirre, director of the IMF’s Western Hemisphere department, has offered the most pessimistic view of the risks faced by the region.
“These days, all eyes are on Europe. While deteriorating conditions there have not yet spilled over to Latin America, we will not be immune if the risks move to the foreground," he wrote.
He brings up one possible scenario in the banking sector:
“Eurozone banks account for one quarter of banking assets in the larger Latin American countries, on average, and many of those banks are not lending or rolling over existing lines in an effort to shore up their balance sheets. But if the simmering crisis in Europe comes to a boil, that process could speed up, especially if eurozone banks are starved for short term dollar funds (though these banks have prudently funded their Latin American activities largely through local-currency deposits, reducing their vulnerability to a dollar funding squeeze). Fewer external credit lines available to banks could trigger a credit crunch in Latin America, coming on top of a decline in confidence and slower investment and, if the malaise spreads to Asia, falling commodity prices: a toxic mix for growth and stability.”
