South America braces for fallout from crisis in north

By Marco Aquino and Caroline Stauffer

LIMA (Reuters) - South American nations said on Friday they are well-positioned to withstand a sharper global downturn but want to insulate their economies further from a crisis of confidence they blame on Europe and the United States.

Although most central banks in the region have record holdings of foreign reserves, South American finance ministers said they were considering using the Latin American Reserve Fund (FLAR) and the CAF development bank to help plug potential balance of payments deficits if they should arise during a weakening of the world economy.

They said specific measures would not be announced until at least August 12, when South American finance ministers and central bankers meet in Argentina.

Latin America is "well-prepared for a possible worsening of the crisis," Brazilian Finance Minister Guido Mantega said.

Debt defaults, hyperinflation and currency devaluations hobbled Latin America for much of the past century. But the region's economies have performed well over the past decade.

Many local policymakers now see themselves as symbols of fiscal and monetary rectitude and are aghast at what they see as the political foot-dragging and debt woes weighing on the U.S. and European economies.

"The crisis of confidence is in the north, not the south," Peru's Finance Minister Luis Miguel Castilla said.

South American asset prices tumbled on Thursday during a global selloff in which investors shed risky assets in emerging markets for short-term instruments, cash and gold. But they were showing signs of a mild recovery on Friday.

"Countries have to be prepared for consequences that can arise, we must be united to create mechanisms for dealing with this situation," Mantega said.

The finance ministers hope to draw up concrete steps to help protect their economies, but have not detailed any plans.

"This is the moment for South America to act as a group ... and solidify our economies to face difficult events. We are in very stormy seas," Colombia Finance Minister Juan Carlos Echeverry said.

Policymakers are also discussing how to manage inflows of hot money, as speculative cash is known, which has caused most currencies in the region to rally over the past few years.

That trend has allowed central banks to build up record foreign reserves to help withstand economic shocks by buying dollars on local foreign exchange markets. But it has also undermined the competitiveness of their exports.

Brazil this week announced a $25 billion lifeline for manufacturers whose sales have plunged as consumers snap up imports made cheaper by a strong local currency. The real is considered one of the world's most overvalued currencies and is trading at a 12-year high.


Meanwhile, South American central bankers in Chile on Friday said they see heightened risks and a moderation in the region's swift economic growth.

"The region's economies have shown a favorable evolution since the previous meeting, though a moderation in expansion has been noted, in line with a loss of dynamism in the international economy," said a statement by central bank presidents from Argentina, Brazil, Paraguay and Uruguay, as well as Bolivia, Chile, Peru and Venezuela.

"However, high commodity prices have continued, which have favorably impacted terms of trade that, along with capital inflows, have kept pressure on the appreciation of currencies in the region."

(Additional reporting by Simon Gardner and Patricia Velez in Santiago; Editing by Dan Grebler and Kenneth Barry)