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Capital Keeps Flowing into Latin America

Though Latin America – and South America, in particular – has been in crisis for years, foreign capital has continued to flow into the region. Are the days of sudden stops and abrupt reversals in external financing over?

BOGOTÁ – Latin America – and South America, in particular – has been in crisis for years. Yet foreign capital, both direct and financial investment, has continued to flow into the region. This is unprecedented.

In the past, the interruption of financial flows – or “sudden stops” – has been an essential feature of crises in Latin America and elsewhere in the developing world. The Latin American debt crisis of the 1980s brought an eight-year interruption. The Asian financial crisis that erupted in mid-1997 and subsequently spread across the emerging economies caused an interruption lasting six years. The interruption associated with the Great Depression of the 1930s lasted several decades.

Yet these dynamics seem to be changing. After the collapse of the US investment bank Lehman Brothers in 2008, capital flows were interrupted for only about a year. Indeed, despite the magnitude of the initial shock, capital flows and risk margins had essentially normalized by 2009, when bond financing in Latin America began to surge, soon reaching triple the pre-2008 average.

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