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Latin America

Argentina's financial woes weigh on neighbors

Argentina's economic crisis is spreading to neighboring states. Brazilian exporters, particularly carmakers, have had to accept losses as business slows in the face of market uncertainties.

It seems Argentine President Christina Fernandez de Kirchner was right after all.

July 30, the deadline for her indebted country to repay outstanding arrears to its creditors, came and went without much fanfare - just as the president predicted.

It was also the day that Argentina was officially declared bankrupt. Perhaps nowhere was that news received as calmly as in Buenos Aires.

After all, with the country's economy having already hit rock bottom, how could things have gotten any worse? The benchmark Merval stock index even climbed the next day.

For Argentina's neighboring countries and trade partners, life went on as well - but not without considerable economic unease.

Of course, the current default will not have the same devastating impact as the one in 2001. The circumstances are different.

But the longer the current insolvency lasts and the more protracted Argentina's row with its hedge fund creditors gets, the more exacerbated are worries in the region as a whole.

Brazil's exports slump

Brazil, for instance, is one of Argentina's largest trading partners and it is not at all amused about the plight of its neighbor. The Brazilian economy is currently struggling with alarmingly high inflation and its economic prospects are all but certain.

Argentina cannot entirely escape at least some of the blame for Brazil's current predicament. Argentina has, to date, been Brazil's third most important recipient of exports after China and the United States.

Far fewer products were shipped across the border in the first quarter of 2014. Car exports alone dropped by a staggering 25 percent.

"Argentina is one of the largest buyers of goods produced here," said Jose Augusto de Castro from the Brazilian Foreign Trade Association. "The automotive sector in particular doesn't have any real alternatives, with 85 percent of overall output going to Argentina."

For many small and medium-sized companies in the Brazilian states Rio Grande do Sul and Santa Catarina, Argentina is the only sales market. And should the Argentina economy contract even further, it could stop importing altogether.

"Buenos Aires needs a trade surplus and therefore has to reduce imports," de Castro said.

Peso depreciates

Experts take it as a given that the Argentine peso will depreciate even more and affect smaller neighboring countries.

Uruguay, for one, is worried about its tourism industry that welcomes 1.76 million Argentine vacationers every year. Travelling in Uruguay has never been inexpensive, but with a weakened peso, such holidays could become unaffordable.

Uruguayan exports would take a hit too, in particular textiles, paper and household appliances.

Punta del Este, Uruguay

Being on vaction in Uruguay is a costly affair for Argentines

Chilean businesses, such as the Falabella and Cencosud retail chains, are also concerned as currency depreciation weighs on their share prices, although Chile's economy is expected to remain largely unfazed by the crisis of its neighbor.

"We have largely decoupled from the Chilean economy," said Alejandro Alarcon, an economist from the University of Chile. "Our exports there amount to only 1 percent of overall shipments. So in real trade terms, the default has no impact on us."

Bolivian gas guarantee

Another one of Argentina's trade partners, Bolivia, views the nearby default with similar nonchalance. It pumps 17 million cubic meters of gas across its neighbor's borders in exchange for US dollars. In the first quarter of 2014 alone, Bolivia sent Buenos Aires an energy bill of $582 million.

Rio Grande oil refinery in Bolivia

Bolivia is a major supplier of oil and gas to Argentina

Rumors have been swirling about backpayments piling up for quite some time now that Argentina is technically insolvent, but the head of the state-run YPFB oil and gas company, Carlos Villegas, has denied them.

"Argentina is paying up in line with the stipulations of the accord, meaning it has not run up any debt," he said.

To be on the safe side, YPFB still sits on $400 billion from Argentina as a kind of security deposit - the equivalent of two months of supplies.

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