From Decoupling to Deleveraging and Divergence
The rise (and fall) of capital markets is an object lesson for Latin America's policymakers.
The global financial crisis has caused a dramatic disruption in Latin American capital markets. While asset values in mature markets had been diminishing for well over a year prior to the fall 2008 meltdown, the crisis hit Latin American markets abruptly. In a matter of months, major regional stock indices lost nearly half their value, the issuance of corporate securities came to an abrupt and seem- ingly definitive end, and foreign investors fled the region en masse.
Capital markets in
The financial crisis has crystallized this divergence. The strength of capital markets not only serves as a rough proxy for overall economic health, it is one of the key determinants of growth. In
Prior to the 1990s, Latin American capital markets were grossly underdeveloped and consisted primarily of sovereign bank lending—in contrast to the prolonged expansion of financial markets in developed economies that began with the demise of the Bretton Woods system in the early 1970s. Local equity and bond markets remained negligible and did not attract the attention of international investors. Latin American governments’ disproportionate reliance on commercial bank debt led to the debt crisis that stunted economic growth across much of the region in the late 1970s and early 1980s and limited the development of domestic capital markets for nearly a decade...