In this note work from the end of 2001to August 2002 is updated in an attempt to disentanglepotential contagion and spillover effects of the Argentinecrisis from other sources of co-movement or marketvolatility. We also examine the evidence on FDI flows,inquiring about potentially more lasting deterioration ofcapital flows to the Region. The recent increase in spreadsacross the region appears more correlated with the largelyautonomous increase in spreads in Brazil (caused mostly byuncertainties arising from the electoral period, though alsoinfluenced by U.S. stock market turmoil and a fall inexports due to the collapse of the Argentine market) thanwith the protracted Argentine crisis. To some extent, itreflects some extent general market volatility, which wasfelt beyond the LAC region. Thus, we may expect that thepresent situation of high levels and volatility of spreadsin the region will be maintained as long as theuncertainties arising from the Brazilian electoral processcontinue to impact the perception of Brazil country risk;and a further deterioration in this perception might haveimportant consequences on market access and spreads acrossthe region. Political events in other countries (electoraltransitions in Bolivia, Colombia, and Argentina, socialturmoil in Peru and Venezuela, increased violence inColombia) as well as some forms of political contagion(Duhalde's statements on the failure of promarketpolicies in Mercosur; emerging anti-privatization stances insome countries, such as Peru) may have also contributed tospread increases and volatilities. Volatility and increasesin risk perception in OECD markets, as a consequence ofrecent corporate accounting scandals, might also contributeto volatility and high spreads in the region. However,evidence of such effects is so far significant only for afew countries (notably Mexico and Brazil).
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