The Global Crisis: Latin America - Meltdown that matters: Samba effect follows tequila tumble

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AFTER MEXICO'S financial crisis, the money men spoke of "the tequila effect". After Russia's meltdown, the fear was of "the vodka effect." Now, with Brazil in financial turmoil, the analysts are warning of a "samba effect".

And, they say, the fall-out from a Brazilian financial collapse could make the Mexican, Russian or Asian crises seem small beer.

Why? Because Brazil is the locomotive that drives all Latin America economies, a still largely untapped market of 350 million souls. When Brazil's economy sneezes, Latin America catches a cold. When Latin America catches a cold, the US reaches for the medicine cabinet. And when the US feels sick, well ...

Brazil's leaders continue to insist that they have not reached the crisis point of Russia last year, that their currency, the real, will survive its nosedive and that they have no intention of defaulting on the country's massive debt.

Publicly, international financial officials back that view. That's their job. Privately, the financial world is getting jittery.

The real fell below the psychological two-to-a-dollar barrier on Friday, down 10 per cent on the day. That made it 45 per cent less valuable than it was under three weeks ago.

Interest rates of 37 per cent were failing to keep reais in the country while making it proportionately more expensive for the country to pay back its crippling debt.

It sounded like Russia revisited as the D-word, for default, returned to everyone's lips.

But why does a Brazilian meltdown worry the financial world more than what happened in Russia? In many ways, the Russian crisis received front- page headlines because of fixed Cold War-based ideas, the fact that it is a major military power with nuclear weapons. In reality, although it had shifted towards capitalism, its economy was hardly crucial to the world capitalist system. Brazil may still be considered Third World because of its dire poverty but it is now the world's eighth largest economy. US financial exposure in Brazil is higher than it is in all of Asia.

Brazil is also by far the largest economy south of the Rio Grande and is interlinked with the rest of Latin America, which buys one-fifth of all US exports.

On the frontline of any Brazilian collapse is neighbouring Argentina. Reflecting the latter's nerves over the fall of the real, the Argentine President, Carlos Menem, broke a taboo last week by criticising his Brazilian counterpart's handling of the financial crisis.

Brazil is already in recession. If it gets worse, Argentina loses its main export market. US corporations, from Coca-Cola to Ford, would also suffer heavily, forcing job losses at American plants. Florida businesses are already complaining about losses because wealthy or middle-class Brazilians who frequent the Sunshine State now find they have effectively to pay 45 per cent more.

When Brazil surprisingly devalued its currency last month, the Dow Jones average plummeted 3 per cent in half and hour.

After Brazil tamed four-digit inflation in the early 1990s, it became the darling of daring investors, the most attractive of the emerging markets. Direct foreign investment soared from $2bn to $36bn.

But its high interest rates also attracted speculative money, much of which has poured out in the current crisis.

An International Monetary Fund (IMF) delegation arrived in Brazil at the weekend to help to sort out its problems. But many Brazilians feel the focus on exchange and interest rates is failing to get to the heart of the matter. That, they say, is the fact that the rich-poor divide is widening and that reliance on international bail-outs is ignoring or aggravating the problem.