Capital Flows to Latin America Fourth Quarter 2001

The heightened market uncertainty associated with the September 11 events initially translated into higher risk aversion in the beginning of the fourth quarter. However, risk aversion gradually decreased during October and November. Technicals and declining risk aversion drove market performance more than fundamentals since early November, even as Argentina sunk deeper into crisis.

Emerging bond markets posted a strong performance in the fourth quarter of 2001 despite Argentina's turmoil, and equity markets outperformed their counterparts in mature markets. The September events had only a temporary effect on spreads, increasing the overall EMBI+ excluding Argentina to about 850 basis points in the first week of October, but moderating thereafter. New debt issuance picked up in November, remaining robust in December, allowing a substantial amount of pre-financing for emerging market borrowers.

The continued absence of any significant contagion from events in Argentina was an important feature of the fourth quarter of 2001. However, although immediate spillover from Argentina's crisis was limited, the longer-term negative effects on capital flows to the region could be significant.