Brazilian Markets Extend Slide; More Declines Seen (Update9)
Brazilian Markets Extend Slide; More Declines Seen (Update9)
(Adds central bank denial on floating the currency.)
Sao Paulo, Jan. 14 (Bloomberg) -- Brazilian interest rates
soared and stocks plunged as yesterday's currency devaluation
threatened to trigger new declines in the real and throttle
growth in Latin America. Standard & Poor's Corp. responded by
cutting Brazil's credit rating one notch.
The currency was unchanged at 1.32 against the dollar --
after sliding 8 percent yesterday. Interest rate futures for
February surged to 72 percent. The benchmark stock index dropped
9 percent as traders bet the rising rates will choke an economy
already projected to shrink up to 4 percent.
The surge in interest rates and the stampede of $1.1 billion
out of the country yesterday suggest Brazil may be unable to
avoid a further devaluation, roiling world markets. Floating the
currency -- a move the central bank denied considering -- could
drive it down to 1.7 to the dollar, investors say.
''There's going to be a sell-off, and I see more devaluation
coming sooner rather than later,'' said Michael Gavin, Warburg
Dillon Read's chief Latin America economist. ''They have only
reduced confidence in their exchange rate policy.''
Debts
Brazil's decision may make it harder for companies in
emerging markets to raise money and more expensive for the
government and companies to repay almost $300 billion of debt
linked to foreign currencies.
It will likely pinch profits of international companies
doing business in Brazil. Motorola Inc. said today it would take
a $15 million first-quarter charge to cover losses stemming from
the devaluation. Shares of U.S. banks, which have an estimated
$65 billion in investments at risk in Latin America, fell. J.P.
Morgan & Co. fell as much as 3 1/8 to 103 7/16.
''The real danger is that Brazil is just the first shoe to
drop,'' in Latin America, which accounts for 20 percent of U.S.
trade,'' said Peter Coolidge, a senior equity trader at Brean
Murray & Co.
The most immediate victims of the devaluation are Brazilian
companies. They've scrambled to hedge their exposure, though
markets for trading foreign exchange swaps and currency futures
were shut because of rules that limit the real's drop to 1
percent a day.
''These companies that aren't managing to obtain a hedge
through the market are moving their funds offshore.'' said Fabio
Jacob, pricing manager of Banco CCF Brasil SA.
There are some winners.
Marcopolo SA, the world's biggest producer of bus and coach
bodies, plans to take advantage of the cheaper real by boosting
exports.
''We are going to reschedule our export strategy in order to
increase export levels,'' said Jose Antonio Martins, the
company's vice-president.
Doubts
The companies' rush to hedge reflects growing doubts Brazil
will be able to sustain its latest currency target. The real
reached the limit imposed by the central bank of 1.32.
In currency-exchange houses, dollars were selling at 1.37
reais, down from as much as 1.50 reais yesterday, as Brazilians
rushed to the exchange houses to buy dollars afraid of a massive
devaluation.
''Everybody is scared with this devaluation so we have many
dollar buyers and no one selling,'' said an operator at one
downtown exchange house in Sao Paulo.
History is not on Brazil's side. Other emerging market
countries, including Mexico, Russia and South Korea, have
attempted similar controlled devaluations and have failed.
Standard & Poor's said the devaluation probably wouldn't
accomplish the government's aim of reducing interest rates and
reviving the economy, which is forecast to shrink as much as 4
percent this year by private economists.
The New York-based rating company reduced Brazil's long-term
foreign currency rating one notch to ''B+'' from ''BB-,'' making
it the lowest rated country in South America along with
Argentina.
The high rates needed to sustain the currency could throttle
an already slumping the economy and block the government's key
aim -- reducing its projected $64 billion budget deficit this
year.
''Interest rates may likely need to be increased and kept
high to defend the new policy and build its credibility,'' S&P
said in a statement. ''In an alternative scenario, should the
real eventually be permitted to float, interest rates likely
would remain high and volatile.''
Capital Flight
Some $1 billion fled Brazil Wednesday, on top of the $1.2
billion the day before. If these outflows continue, Brazil's $70
billion in reserves -- which include a credit line arranged by
the International Monetary Fund -- won't last long.
Together, the government and companies have almost $300
billion in foreign currency denominated debt.
''No country has gotten away with a selective, small
devaluation,'' said Peter de Svastich, chairman of Westhem
International, which specializes in Brazil and Argentina and
manages assets of about $120 million. De Svastich said the real
may fall to 1.7 to the dollar in as few as five days.
Engineering a small devaluation won't work, ''we've seen
this time and time again,'' de Svastich said.
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