FOCUS-Brazil devalues cherished real to fight crisis
Reuters, Wednesday, January 13, 1999 at 08:08
(updates with real devaluation, central bank governor resigns)
By William Schomberg
BRASILIA, Jan 13 (Reuters) - Brazil, desperately seeking a
way out of a deep financial crisis, effectively devalued its
inflation-busting real currency by nearly eight percent on
Wednesday after the president of the Central Bank said he would
resign.
The dollar rose by 8.6 percent against the real -- an
effective real devaluation of roughly 7.5 percent -- immediately
after the Central Bank removed a tight mini-band in which the
currency had previously traded.
The real was trading at 1.3/1.315 reais to the dollar, close
to a new floor of 1.32 immediately after the announcement of the
new wider band. The real closed at 1.2110 to the dollar on
Tuesday.
Financial markets around the world were already in turmoil
before Wednesday's announcement amid fears that Brazil would not
be able to keep a grip on the real amid huge dollar outflow.
"This had been anticipated. The markets were nervous about
it all morning and there's relief it's not worse," said Ravi
Bulchandani, head of global currency strategy at Morgan Stanley
Dean Witter in London.
Brazil's foreign exchange policy has served as the anchor of
the country's four-year economic recovery after decades of high
inflation.
Markets have long considered the real overvalued but feared
a devaluation might spark the kind of crisis of confidence among
investors that plunged Russia and much of Asia into chaos after
they bungled devaluations last year.
The dollar dropped more than one percent against the euro in
Europe as markets worried about how a full-blown crisis in Latin
America's biggest economy would affect the United States, which
sends 20 percent of its exports to the region.
Franco, a staunch defender of Brazil's previously rigid
foreign exchange policies, said he recognised the world's eighth
largest economy needed to change its controversial economic
policy mix of an overvalued currency and high interest rates.
"For some time I have seen the need for flexibility in
interest rate policy and foreign exchange," Franco told a news
conference after announcing his resignation.
He said the Central Bank's Director of Monetary Policy
Francisco Lopes would take over at the bank.
"The loss of a person like Franco is in itself negative,"
said Carlos Kawall, chief economist at Citibank in Sao Paulo.
"The important things is the confirmation of Francisco Lopes
to replace him, which signifies continuity and reduces somewhat
the negative impact since he's in the same group."
Franco took over control of the Central Bank in August 1997
and had been heavily involved in Brazilian economic policy for
several years before that as a director at the bank.
His resignation came after a dismal Tuesday that saw nearly
$1 billion flood out of Brazil's foreign exchange markets, a
level unseen since late last year when only a huge package of
international loans prevented a devaluation.
Brazil's latest crisis began last week when a rogue state
governor announced a 90-day moratorium on debt payments to the
central government.
While the sums involved were small, the move raised fears a
crucial austerity drive could be derailed and that concern
snowballed into panic by Tuesday.
Brazil's foreign currency reserves are believed to be about
$35 billion, not including a first $9 billion tranche of loans
freed up by the International Monetary Fund and industrial
nations last month.
The reserves have plunged from nearly $70 billion before
Russia defaulted on its debt in August, a move that roiled the
world's financial system and undermined confidence in Brazil,
which is saddled with a budget deficit equal to nearly eight
percent of gross domestic product.
Copyright 1999, Reuters News Service
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