Financial Times
December 6 2002

International observers greeted the news of the shake-up in the US Treasury and the surprise resignation on Friday of Paul O'Neill with a mixture of relief and uncertainty.

Mr O'Neill's resignation provided something of a short-term fillip for Brazilian financial markets, with bond prices rising by about 2 per cent. But in the longer term it seems likely to add to economic uncertainty in the region.

The former treasury secretary helped in August to secure a $30bn bail-out package for Brazil, but only after he had unwittingly deepened the country's financial difficulties by implying previous support packages had been siphoned into Swiss bank accounts.

"O'Neill showed a complete lack of diplomacy," said Alberto Bernal, Latin American economist at IDEA in New York. "He had such a big mouth and he had some tough en- counters with Latin American leaders."

Bond yields, which have risen this week amid worries about rising inflation and uncertainty over the composition of the incoming government team, fell by nearly 1 percentage point.

However, analysts cautioned that there was still no certainty that Mr O'Neill's successor would give any more priority to the region. "It doesn't necessarily signal a change in tack," said Mr Bernal.

In Argentina the news was viewed positively. The perception there is that the biggest problem for the country is the International Monetary Fund rather than the US Treasury.

Argentina's negotiations with the IMF over a standby loan have been bogged down because of what many Argentines see as the fund's intransigence.

"Some people are hoping that a new person at the Treasury may be able to persuade Ann Kreuger [the IMF's deputy managing director] to help us," said Pedro Lacoste, an independent Buenos Aires-based economist.

In Mexico the peso, which has been largely isolated from the financial turmoil in the rest of Latin America by its increasing links to the US, initially fell sharply on the news of the resignation but then recovered.

"I think US economic policy under Mr O'Neill has had until now a largely negative effect on Mexico," said Rogelio Ramirez de la O, an independent economist in Mexico City. "However, it does not mean that his resig- nation necessarily will be positive."

In Britain, meanwhile, the announcement took government officials by surprise. A Treasury spokesman said: "The chancellor has greatly enjoyed working with Paul O'Neill over the past two years and is sorry to hear of his resignation. In particular, they shared a common interest in development issues."

The chancellor was "grateful for the real and positive contribution Mr O'Neill made to the work of the international monetary and financial committee as well as the G7 and other international fora."

Paul Davis, director of US government relations for Health GAP, the global Aids activist group, said Mr O'Neill had laid the groundwork for President George W. Bush's plan to stop mother-to-child transmission of Aids, announced in June but still not funded. "We worry about the fate of this initiative after Mr O'Neill's departure."

Reporting by Richard Lapper in Sao Paulo, John Authers in Mexico City, Christopher Adams in London and Lauren Foster in New York.