In the second quarter of 2002, conditions in global financial markets worsened as investor confidence deteriorated and risk aversion heightened. The revelation of corporate accounting irregularities in mature markets negatively affected investors' sentiment, causing a rebalance of portfolios in favor of higher quality assets and away from equities and low-grade bonds. Countries seen as higher risk were adversely affected by this rebalancing of portfolios. A number of Latin American countries were the focus of investors' concerns, in particular Brazil, where developments during the second quarter reflected investors' uncertainties about continuity of market friendly policies after the presidential elections, as well as worries about the possibly unsustainable dynamics of the Brazilian public sector debt. Access to international capital markets declined significantly to low-grade issuers in Latin America. Given that sovereign borrowers had covered most of their financing needs for this year, Latin American corporate borrowers, in particular, were vulnerable to the closure of international capital markets. Credit enhancements, such as secured bond issues and insurance from a third party, were required from corporate issuers in high-risk countries. By the end of the quarter, with international capital markets closed for unsecured issues, top tier corporates in Latin America started to turn to domestic markets as a source of financing. Although during most of the second quarter investors discriminated among emerging markets based on their policy stance and track record, toward the end of the quarter signs of contagion from Brazil emerged, as the correlation of emerging market bond movements with developments in Brazil increased (Table 1). In addition, contagion from Argentina was felt by neighboring countries through banking and real sector channels. A banking crisis in Uruguay was precipitated by capital outflows as liquidity constrained Argentine investors withdrew savings from their neighbor country's banks. The increased volatility in Brazil and contagion from Argentina led to a great number of credit downgrades during the second quarter. After Standard & Poor's upgraded Chile's A- foreign currency debt outlook to positive from stable in April, only downgrades followed.