Factiva

BUENOS AIRES -- Canadians have seen it as the Tequila Effect, the Asian Flu and the Samba Effect -- contagion from another country's financial crisis that hits Canada and other sound nations in the form of a sharply weakening currency and higher risk premiums on bonds.

Now Argentina is embarking on the world's biggest debt default and is in the midst of a sharp devaluation. But so far, no Tango Effect to speak of.

Analysts warn that it may just be a matter of time before Argentina's crisis spills over into its close neighbours and trading partners -- Brazil, Paraguay and Uruguay. But nobody is talking international crisis, like we saw when Thailand devalued the bhat in 1997.

When Thailand fell, other Asian countries toppled like dominoes in quick succession, with foreign investors yanking their money out of Indonesia, Malaysia, Hong Kong and elsewhere, undermining financial sectors and devaluing currencies. The Asian flu spread to Russia, and Canada's dollar dropped to what was then an all-time low. Commodity prices around the world were hammered by the crisis.

Brazil began to teeter, and then it fell too, devaluing its currency and rattling emerging markets, especially in Latin America, during the first half of 1999.

Mexico's devaluation in 1994 saw similar ripples throughout the world, mainly in the Americas.

Argentina has had some effects on other countries. When Argentina announced it would devalue its fixed currency last week, Uruguay immediately followed suit. Brazilian companies doing business in Argentina or dependent on Argentine trade have been hurt severely and are not content to keep quiet about it. And the Brazilian government, having experienced its own crisis just a few years ago and anxious to avoid a repeat, has told Argentina it will do all it can to help its neighbour regain stability.

But spreads on Brazilian bonds -- a measure of risk -- were higher a year ago than they are now. And the Brazilian real seems to be trading on its own fundamentals, not Argentina's. However, the real showed some weakness Friday, as did markets in Chile and Mexico, after a chaotic process that led to some of Argentina's pesos beginning to trade at a floating rate. But it's hardly a crisis.

The lack of contagion was one of the prime reasons the International Monetary Fund felt comfortable refusing to extend $1.3-billion (U.S.) to Argentina in December. The tranche was part of a larger loan to be given to the Argentine government only if it lived up to certain fiscal conditions, which were not met.

So, why hasn't Argentina's pandemonium spread? Partly because many international investors predicted the Argentine crisis well over a year ago and have had plenty of time to readjust their portfolios calmly, without punishing other markets for Argentina's problems, economists say.

"Argentina's downfall has been one of the best-telegraphed crises in recent memory, and that has given investors plenty of time to head for the exits," said Gillian Manning, international economist for Toronto-Dominion Bank.

"This latest flare-up was the culmination of a long, slow burn during which Argentina became progressively more isolated from other emerging markets. That will help to keep the contagion limited in the months to come," she said.

The containment of Argentina's crisis is also partly because key emerging market bond indexes, which were heavily weighted toward the country a year ago, have gradually cut back. The J.P. Morgan index now has virtually no Argentina weighting. Instead, other emerging markets, especially Brazil, now carry heavier weightings, prompting portfolio investors to gradually dump Argentina bonds and buy Brazil instead.

"There is a general sense of anticipation that international investors will pick up Brazilian bonds due to the removal of Argentina from the [J.P. Morgan Emerging Market Bond Index]," said Walter Molano, head of research at BCP Securities.

Other analysts point out that during the Asia crisis, it was only countries with fixed exchange rates that were vulnerable to mass withdrawals by international investors. Now, however, most of the world's key emerging markets have been forced to switch to floating exchange rates.

Argentina was a key exception. And while other Latin American economies are no doubt feeling the economic effects of having trade and investment with Argentina virtually come to a standstill, they are able to absorb those effects in their floating exchange rates without dropping into a crisis.

Still, the crisis in Argentina is far from over. The new government of Eduardo Duhalde faces growing street protests, dissent from within his own party, and intense pressure from foreign investors in Argentina as well as the IMF. And so far, he has not come up with a long-term economic plan for the country.

While many of Argentina's problems right now are a result of its own political and economic mismanagement, the country itself is partly a victim of contagion.

Few currency traders or investors doubted Argentina's ability to uphold its 10-year-old one-to-one peg with the U.S. dollar until Brazil devalued in 1999. Only then did confidence begin to erode in Argentina's ability to find sufficient reserves to back up its currency. That lack of confidence spilled over into the general public, who turned their backs on pesos in favour of dollars, and undermined support for the financial system, economists say.

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