BOSTON AND MEXICO CITY — IS it over?
A huge bounce in Latin American stock prices in recent days may signal an end to the worst financial crisis to hit the region in more than a decade.
Mexico's peso swoon in December led to an exodus of capital from all of Latin America (and other developing nations) and a sombrero-sized bailout that sent tremors through the world's financial institutions.
The plunge in Latin American stock prices over the last three months alone has knocked hundreds of millions of dollars off the value of United States pension and mutual funds invested in the region.
But stock markets in Argentina, Brazil, and Chile have soared in a robust show of returning investor confidence. The Buenos Aires stock index is up about 28 percent since last week, buoyed by Monday's announcement of a $11.1 billion financial package designed to bolster the Argentine peso and a wobbly banking system.
By comparison, a 28 percent jump on the Dow Jones industrial average would mean adding about 1,100 points to the current market level.
''The worst is over in Argentina and the Mexican peso has stabilized within a broad range,'' says Geoffrey Dennis, director of emerging-market research at Bear, Stearns & Co., a New York brokerage firm. Investors are starting to discriminate between Mexico's problems and the financial status of its southern neighbors, he says.
There's consensus that Colombia, Chile, and Brazil are doing well economically and have relatively sound financial institutions. But bank analysts and economists are divided over whether Mexico, Argentina, and Venezuela are out of the woods yet.
The key will be lower interest rates, economists say. If interest rates remain at current high levels for long, it could be devastating to the banks and overall economies of these three countries.
Mexico and Argentina, especially, depend on foreign investment for financial liquidity and to fund trade deficits. When investors get jittery about the economy or the political situation, the government has to raise rates to keep them from seeking safer returns elsewhere. This week, Mexican Treasury bills were sold with annual yields topping 90 percent.
But high interest rates discourage domestic economic growth and may push monthly payments on mortgages and other loan payments beyond the means of debtors. If banks can't attract borrowers or collect on loans, they risk going out of business.
To reassure foreign investors and provide more credit (with the goal of reducing interest rates), Argentina's Finance Minister Domingo Cavallo put together a finance package that injects money into the economy by borrowing $4.7 billion from international lending institutions, such as the World Bank, raises $2 billion from the sale of bonds, and gets another $4.4 billion through the sale of government-owned companies, cutting spending, and raising taxes.
A week ago, Mexico announced a similar government austerity package. Mexico's Finance Minister Guillermo Ortiz briefed investors on the details Tuesday in New York.
Greg Root, president of Thomson BankWatch, a New York-based global bank-rating agency, is optimistic about the Argentine plan. ''Argentine banks are better capitalized than Mexican banks ... the entire situation is more manageable than Mexico.''
But Morgan Stanley bank analyst Rafael Bello is less sanguine. ''These are positive steps but its too early to say everything is OK in Argentina. The economy will grow very little this year, if at all. If interest rates stay high and borrowers can can't pay their debts -- it's hard to say now if $4 billion to $5 billion [from international lenders] is enough to rescue the banking system.''
If Mexico's economic problems worsen, Mr. Bello says, investors might still hitch their fears to other Latin economies. ''If Mexican companies continue to struggle, and the peso falls again, we could see pressure on Argentina and other stock markets. I don't think we've had a perfect decoupling yet,'' he says.
The outlook for Mexican banks and the economy overall is dubious. Massive layoffs of bank employees and sharp cuts in the benefits of those staying on are only two of the outward signs of the troubles shaking Mexico's banking industry.
On March 3, the government took over Asemex-Banpais, a financial group formed by two insurance companies and the nation's eighth largest bank. Authorities cited lax management and insufficient capital and reserves. It was the second major banking group rescued by the government.
Salomon Brothers, a New York-based investment banking firm, lists eight ''high risk'' Mexican banks (out of 25) whose financial health it says will continue deteriorating.
Rather than take over every foundering bank, the Mexican government has set up what it calls a Temporary Capitalization Program, funded with dollars, that banks can draw on to keep their heads above rising bad debt. The International Monetary Fund and the Inter-American Development Bank have put up $3 billion to stabilize Mexico's banking system.
Some critics attack the Mexican government's capitalization program as a de facto ''renationalization'' of banks that were only recently privatized. Analysts predict some of Mexico's smaller banks will merge or fold as customers, seeking safety, have already begun to take their savings to the larger banks.
Well-capitalized US banks are now setting up subsidiaries in Mexico, freed to do so by terms of the North American Free Trade Agreement. But analysts don't expect them to buy up the failing Mexican banks. Rather, they may accelerate the decline in Mexican bank earnings by competing with them for their best corporate customers, observes Jim Freer, editor of Latin Finance, a Coral Gables, Fla.-based magazine.