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Latin America Faces Credit Squeeze If Euro Crisis Worsens -IMF Official

Sunday, 08 January 2012 | 00:00
Latin American economies face a recession and a credit squeeze if Europe's debt crisis worsens, a senior International Monetary Fund economist said.
Shoring up government finances and easing monetary policy should help Latin American nations to prepare for the worst, given the rising risks from the euro area, said Nicolas Eyzaguirre, director of the IMF's Western Hemisphere Department.
"We don't see a recession coming in Latin America if the European crisis remains contained, but weaker growth is clearly in the cards, not least because confidence and commodity prices have been falling," Eyzaguirre said in an IMF blog.
If Europe's simmering crisis comes to a boil and euro-zone banks are starved for short-term dollar funding, Latin America could face its own financial turmoil.
"Fewer external credit lines available to banks could trigger a credit crunch in Latin America," Eyzaguirre, Chile's former finance minister, wrote. On top of a decline in confidence, slower investment and if the malaise spreads to Asia, falling commodity prices and a credit crunch would be "a toxic mix for growth and stability."
He said in countries where inflation is under control, easing monetary policy is an appropriate pre-emptive step. He warned that if the euro crisis worsens, governments may need to stimulate their economies.
Also, "financial systems should be under extra scrutiny for signs of stress, with a particularly watchful eye for liquidity strains," he said.
Overall, Eyzaguirre praised Latin American economies for managing their economies and markets "skillfully" since the 2008 financial crisis, putting them in a position of strength in advance of Europe's strains spilling into the region.
The IMF economist also said the fund is expecting slower global growth overall, including in China, a major demand center for many Latin American economies.
Aside from Europe's crisis, the inability of the U.S. government to "strike the right fiscal policy balance" in both the near and long term was also contributing to nervous financial markets globally, he wrote.
Source: Dow Jones
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