Summer is here and U.S. financial markets are getting itchy about problems in emerging markets, mindful that it was summer when global financial crises erupted in 1997 and 1998.
"These sorts of things happened last July, and we're hearing rumblings again," said John B. Wimsatt, banking analyst at Friedman, Billings, Ramsey & Co. "You have to wonder if it's going to result in the same situation."
In what might turn out to be the first blow of a summer storm, the market was jolted last week by news that a candidate for the presidency of Argentina had called for a moratorium on debt payments by financially troubled emerging market countries.
Stock markets in the United States fell in response to his statement, and not surprisingly, bank stocks were hit hardest. Several declined by as much as 3% during the day. U.S. banks, which have $12 billion in cross- country exposure to Argentina, according to the Federal Reserve, would be hurt by any moratorium.
If the problem were limited to Argentina, it would be bad enough. But most of the rest of the world, from such industrialized nations as France and Germany to Brazil and Columbia, is battling deep and stubborn recessions.
Last week, two large Mexican companies defaulted on their debts: Grupo Dino, a truck maker, and Bufete Industrial, a leading construction group. Earlier this year, Mexico's largest steel company, Ahmsa, defaulted.
But Argentina may be the touchstone of any new crisis. "The problems in Argentina are severe," said Gary Kleiman, an international banking analyst and president of Kleiman International Consultants Inc. in Washington.
Argentina's foreign borrowings have more than doubled over the past 10 years, to nearly $140 billion, and the country will have to refinance nearly $13 billion starting in 2000.
Given the falling confidence in Argentina, it will be expensive to replace that $13 billion, if it can be replaced at all. And unlike Brazil, Argentina has been enthusiastically following economic rules set down by the United States and the International Monetary Fund. It has freed its markets and pegged its currency, the peso, to the U.S. dollar.
When a dollar enters Argentina, it automatically creates a peso. On the other hand, whenever a dollar leaves Argentina-to pay debt, for example-a peso is destroyed. Thus, an outflow of dollars shrinks the Argentine money supply, worsening the recession.
As a result, inflation is very low, but unemployment stands at 14.5%, according to J.P. Morgan & Co., which predicts that Argentina's gross domestic product will decline 3.5% this year.
"Argentina has highlighted underlying weaknesses that remain in other countries in the region," Mr. Kleiman said. Brazil, to which U.S. banks have $13.4 billion in cross-border exposure, "has failed to implement necessary reforms, Ecuador (with $618 million in exposure) is heading into a debt restructuring, Chile (with $4.9 billion) is in an unparalleled recession and Colombia (with $3.6 billion) has devalued its currency twice," Mr. Kleiman said.
In addition to this cross-border exposure, a handful of U.S. banks also have local subsidiaries or branches in Argentina. BankBoston Corp.'s Argentine subsidiary has $8.9 billion of assets; Citigroup Inc., $8.6 billion; Bank of America Corp., $2.3 billion; Chase Manhattan Corp., $1.2 billion; and Bank of New York Corp., $66 million.
As the recession drives more Argentine companies into bankruptcy, these American-owned foreign banks could be hurt, creating a drain on the parent company's profits. Thomson BankWatch Inc., an American Banker affiliate, said that BankBoston's rise in nonaccruals in 1998 "is attributed mainly to an increase in nonaccruing Argentine credits."
American bankers, for their part, tend to take a more optimistic view. Vladimer Werning, a J.P. Morgan & Co. economist based in Buenos Aires, argues that Argentina is unlikely to actually declare a moratorium and that the talk of one is just campaign rhetoric.
Mr. Werning also says Argentina will not devalue its peso, as many people think, because Argentinians fear that doing so will bring back hyperinflation. And more important, he said, "macroeconomic policies have been consistent," ensuring a secure transition after the elections.
Some analysts see an even more rosy picture because of the problems. Because interest margins tend to widen because of greater risk, the rewards for lending become much higher. If Argentina gets through the current crisis, a handful of U.S. banks could wind up with very handsome profits.
U.S. banks have often done well in times of crisis in Latin America. Earnings at Citigroup and other U.S. banks in Mexico surged in 1995 as a result of strong increases in Mexican peso trading.
Both Citigroup and BankBoston have also benefited from large inflows of local deposits in Argentina and Brazil and large increases in the interest they can charge on loans made locally. Increasingly, U.S. banks are also hedging local currency exposure to prevent any depreciation in the value of their assets in Latin America.