The stocks of Spanish companies with heavy exposure to Latin America fell heavily Wednesday on the news about Brazil's de facto devaluation, so it's a wonder that so many investors and analysts remain so sanguine about the companies' prospects going forward.

Certainly, the companies have had time to prepare for such an event and took a number of steps in advance to mitigate the effects. But with the devaluation of the

real

so real a prospect, it begs the question why these companies did invest -- and still are investing -- so heavily in the region. The answer is not all that reassuring.

On Wednesday, when European bourses fell 3% to 4%, the main Spanish index, with strong business ties to Latin America, fell 6.5%.

Banks were hammered hardest, especially Spanish banks

Banco Santander

( STD), which fell 5.5% in New York trading, and

Banco Bilbao Vizcaya

( BBV), which slid 8.2%. But British, German and French banks were not spared.

Standard Chartered

fell 10.6%, and

Dresdner Bank

dropped 9.2%.

Banco Santander and Banco Bilbao, which have been among the most aggressive of the European banks in the region, have about $3.8 billion and $2.5 billion invested in Latin America, respectively. A steady investor throughout the region's troubles, Santander has been adding to its Brazilian operations as late as the final quarter of 1998 and now has a total of $865 million invested in the country.

Does that mean they have any regrets? Not according to

Jose Luis de Mora Gil-Gallardo

, an analyst at

Merrill Lynch

, who has a neutral rating on the two banks. (Merrill has had an investment-banking relationship with Santander.) He thinks Santander has been under no illusions about the situation in Latin America and as such is taking a "very prudent view looking forward to the next 12 months."

"As a result, both Banco Bilbao and Santander have increased their loan-loss provisions this year, with the more conservative Banco Bilbao providing for 1.2% of total loans and Santander around 0.8%," according to

Michael Ward

of

International Assets Advisory

.

In addition, in the third quarter, Santander increased its capital ratio to 13% from 12.1% in the second quarter and looked to reduce its country risk -- the lending of hard currency from the parent bank to nonresident clients.

Banks are not the only ones hurting.

Telefonica de Espana

(TEF) - Get Report

, the former telecommunications monopoly in Spain, was heavily involved in the privatization of

Telebras

, investing over $5 billion in various majority stakes. It also made key acquisitions in Argentina and is involved in Venezuela through its stake

CANTV

. Such are its ambitions that Telefonica opted to pay its 1998 dividend in shares instead of cash, and it may do the same in 1999 in order to conserve cash for making further investments in Latin America.

Amit Khandwala

of

Wrights Investors' Services

said Telefonica is an extremely well-managed company and describes his investment in Telefonica as an "interesting long-term play."

He notes the company has tried to manage the risk of a devaluation of the real by prepaying the Brazilian government the money it owes for the stakes in Telebras. The benefit is that Telefonica receives interest payments of up to 50% on the money in the meantime.

That will be a smart move if the real is devalued by only 10% to 15%. A more severe devaluation -- a real devaluation of, say, 50% or more -- would end up costing the shareholders money.

Troubles at Home

So why invest so heavily in a region on the brink of disaster? These conquistadores were looking for growth opportunities to offset the fall in margins in their domestic markets -- a process that is expected to continue through 1999 and even pick up significantly in the telecommunications area.

Telefonica's problems at home stem from increased competition. The Spanish market was deregulated on Dec. 1 last year, much later than most of the other European countries. Established competitors include

Retevision

and

Uni 2

, and with the Spanish government awarding a further six licenses in early December to such names as

British Telecom

( BTY)and the aggressive upstart

COLT Communications

( COLTY), losses in its market share are inevitable this year.

Telefonica is especially vulnerable to losses in market share because it has some of the most unbalanced tariffs in Europe, and its hands are often tied when it comes to trying to rationalize pricing. The government has prevented it from raising the cost of calls shorter than two minutes partly for inflationary reasons.

For the banks, profits are threatened by falling net interest margins, the result of lower interest rates and flatter yield curves that led up to the introduction of the euro. As a result, earnings growth this year can only be driven by cost-cutting and restructuring.

Luckily, "Spanish banks compared to other banks in Europe have more room to improve here," said Ward of International Assets Advisory. However, while Santander is moving ahead with restructuring, Banco Bilbao has much more to do in this department.

Certainly no one can accuse the companies of burying their heads in the sand over the potential problems in Brazil, but coupled with their problems at home, even the most bullish investors will be looking very carefully at Santander's 1998 earnings results, due out on Jan. 25, and Banco Bilbao's, to be released Jan. 28 or 29.