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Following the footsteps of Spanish conglomerates focused on Latin America,

Telefonica Media

, the media arm of Spanish telecom giant,


(TEF) - Get Telefonica SA Sponsored ADR Report

, announced last week that its IPO is coming as soon as April. The IPO will be in Spain -- not in Latin America -- the region Spanish conglomerates hope to dominate.

It's not an isolated incident: Telefonica and other Spanish companies are buying up Latin American corporations with remarkable speed. However, the more they buy results in fewer companies on the local stock markets. While this consolidation may spell profits for investors today, it is possibly sowing the seeds for greater regional economic volatility.

Greater consolidation by ex-Latin American companies translates into fewer companies in the region, lower stock market liquidity and, therefore, fewer opportunities for international investors looking for pure regional plays. A greater effect is that with less money coming in from both local and international investors, there is less money to fuel growth in smaller, local businesses that provide the bulk of jobs and foster competition. One of the ingredients for sustainable development, according to the

World Bank

, is the development of sustainable local capital markets.

The investment landscape is changing as Spanish companies buy Latin American benchmark issues. Arturo Porzecanski, Americas chief economist at

ING Barings

said, "A preview was when


( REP) bought


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, it removed the



The Merval is Argentina's main index. If you wanted to have a Latin American equity portfolio, there aren't too many things you can buy today and know that you will be able to sell later."

The new


is still listed on the Merval, but it is not traded often enough to restore the liquidity lost with the takeover, as most investors opt for U.S.- or European-listed Repsol stock. Compounding the problem, the

Madrid Stock Exchange

is redirecting investor focus and money from Latin America to its new Madrid-located


, a stock market for Latin America's largest companies.

James Upton, Latin American equity strategist for

Credit Suisse First Boston

, calls the ever-shrinking local stock markets a "long-term negative for the countries." He sees "corporate restructuring" -- read Spanish companies scarfing all the local plays -- provoking a regulatory backlash in Chile, if not other countries, where they may try to prevent a concentration of the market.

While he concedes that recent M&A activity has brought multinational management and marketing skills to the Brazilian telcom sector, Ian Laming, Latin American strategist at

Morgan Stanley Dean Witter

, also believes there is a need to curtail the drying of local markets. Smaller companies are falling off the radar screens of most investors as the big players get bigger with bigger stock gains. On the

Morgan Stanley Capital International Latin American Free Index

, 30 companies have dropped off in the past year as a result of the international consolidations.

"Brazil is the only country doing anything to encourage broad and liquid local markets," says Laming. The Brazilian government is using minority shareholder protections, derivatives, the merging local markets (like the recent marriage of the benchmark


index and the


of Rio) and other measures to attract and keep money in the local market.

Another solution for Latin American countries is to pump up demand for locally listed companies by targeting local pension funds, which are growing in investment importance with pension privatizations particularly in Chile and Argentina. Currently, many of these funds focus their buying on theoretically more stable fixed-income instruments instead of stocks. To spur demand would be to give portfolios greater diversity and salvage the effects of international corporate restructuring.

The former Spanish monopoly spent what would seem like a hefty $11 billion to buy up South American telecom operators over the last decade. That sum, however, is middling next to Telefonica's $20 billion all-stock buyout of its four largest Latin American plays in Brazil, Argentina and Peru.

Bolstered by its aggressive international growth strategy, Telefonica's stock has risen about 70% over the past three months and over 17% this year alone. While Telefonica's Internet company,

Terra Networks

( TRRA), has had an incredible 910% gain since its IPO last November and is considered by some Wall Street analysts to be a Latin American -- not Spanish -- play. Analysts are already valuing the IPO of Telefonica Media at nearly $5 billion.

Which is all well and good. But while Telefonica and other Spanish shares on the

New York Stock Exchange

, the

Nasdaq Stock Market

and elsewhere are booming, Latin American choices shrink. In the end, that could undermine the region's market recovery -- the very basis, come to think of it, that some of those U.S.-listed Latin American shares are booming.