protracted growth did more to address the principal constraints confronting the region’s financial
markets than the decade of market reform that preceded it. Yet it also masked an emerging divergence
between countries that made prudent policy choices to foster dynamic capital markets and those that
merely reaped the rewards of the commodities windfall and global liquidity boom.
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 Latin America’s strongest economies, well developed capital markets act as
a catalyst. In less dynamic economies, capital market
activity is merely an offshoot of growth, rarely one of
its principal drivers. This distinction will play a significant role in determining the effects of the financial
crisis across the region.
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.
peter hoey
By the end of the 1980s, the debt crisis had metastasized. The region’s capital markets, consisting
almost entirely of sovereign bank loans that debtor
nations were unable to pay, had reached a state of
paralysis. The Brady Plan, designed to help emerging
economies restructure distressed bank loans, largely
in the form of discounted sovereign bonds collateral-ized by U. S. Treasury securities, eased the crisis.
From Debt Relief
to the Boom
The advent of the first Brady bonds in 1989 represented a watershed in the modernization of Latin
American capital markets. Not only did they allow
developing economies in Latin America (and elsewhere) to reduce and restructure their debt, but they
created an erstwhile nonexistent market for Latin
American sovereign bonds. They also restored a measure of credibility to the region, allowing governments to obtain financing in international capital
markets. Perhaps most important, they helped to
usher in a new era of vigorous market reform as regional governments
sought to nurture renewed investor interest in their domestic
capital markets.
After Chile’s early success, efforts to attract
foreign capital
to the region
through privatization formed a
principal component of most
market reform
agendas in the early
1990s. According to the World Bank, Latin American
privatization proceeds grew from only $2.6 billion in
1988 to $25.4 billion in 1996 and had reached a cumulative total of nearly $200 billion by 2003. Again following the Chilean example, several governments in
Latin America adopted reforms to privatize their pension systems during the 1990s, creating institutional
investor classes overnight and dramatically increasing local demand for securities. Seeking to emulate
the market-friendly conditions of their North American and European counterparts, Latin American governments implemented a host of institutional and
regulatory reforms throughout the 1990s, including
the creation of supervisory bodies, improvements in
spring 2009
americas quarterly 57
