making friends in rio
July 31, 2002
Attempts to Talk Up
Brazil's Currency Fail
By JONATHAN KARP and MICHAEL M. PHILLIPS
Staff Reporters of THE WALL STREET JOURNAL
GOING SOUTH
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• Old Demons Sap Signs of Progress in Latin America4
07/26/02
• Brazil's Crash Course in Economics5
07/12/02
SAO PAULO, Brazil -- Brazil's sinking currency continued to defy a global effort to talk up its value, and more-aggressive central bank intervention and potential International Monetary Fund aid may only slow the decline. Brazil's woes spread deeper regionally, sending Uruguay's currency tumbling against the dollar and forcing the government to close the country's banks.
Moving to heal a diplomatic rift after disparaging comments by Treasury Secretary Paul O'Neill, White House spokesman Ari Fleischer on Tuesday praised Brazil's economic policies. He said the Bush administration "will continue to support international financial assistance to Brazil," but stopped short of pledging aid beyond Brazil's existing IMF program.
Mr. O'Neill had suggested in a weekend television interview that aid to Brazil, Argentina and Uruguay -- countries he plans to visit next week -- could end up in Swiss bank accounts. Outraged, Brazil's president demanded a retraction. The U.S. ambassador to Brazil, Donna Hrinak, told Foreign Minister Celso Lafer on Tuesday that Washington "regretted the incident," and, accepting the clarifications, Mr. Lafer declared the "episode over," a foreign ministry statement said.
In volatile trading, Brazil's currency weakened 3.3% to close at 3.300 reals to the dollar in Sao Paulo, its seventh-consecutive record low. Traders said that companies, facing rapidly contracting credit lines for international trade, were rushing to buy dollars. Banks have been paring exposure to Brazil because of uncertainty over October's presidential elections -- two left-wing opposition candidates are leading the opinion polls -- and new doubts about Brazil's ability to service its public debt.
Unlike neighboring Argentina, hit by recession and the collapse of its banking system, Brazil doesn't yet face a crisis in its economy. But investor fear and global-market turbulence threaten to overwhelm South America's biggest economy. Foreign capital flows are slowing, and the billions of dollars in U.S. and other multinational investment here are depreciating by the day.
Brazil's currency has lost nearly 30% of its value this year, including 8.6% this week alone, prompting Brazil to dispatch senior officials to the IMF on Tuesday to ask for more money. Neither Brazilian nor IMF officials will say how much money is being sought.
"The fact that Brazilians are going to Washington isn't enough to change the very adverse dynamics of expectations. The market is asking for concrete measures," said Marcelo Salomon, chief economist at ING Barings in Sao Paulo.
But the same political uncertainty that has spooked investors -- the worry that Brazil's next president will undo eight years of market reforms -- could limit additional IMF support, if it is forthcoming. The lack of political consensus on future economic policies will also leave Brazil's central bank unable to counter bearish sentiment.
Larry Goodman, managing director of U.S. economic-consulting firm Globalecon, says Brazil's currency weakness is partly attributable to the "bursting of myths," including Brazilians' expectation for weeks that an IMF bailout was imminent.
The IMF on Tuesday reiterated a comment from its first deputy managing director, Anne Krueger, who hinted openly in Brazil last week that a new loan wasn't out of the question. "Obviously, it would be easier to negotiate after the elections, when we know who is in the government," Ms. Krueger said. "But if it is desirable to do something beforehand, there will have to be some form of commitment from the principal candidates."
Further IMF aid poses a quandary for the Bush administration, which entered office opposed to bailouts. "Despite the U.S Treasury's instinct against large bailouts, it's hard to imagine the international community would sit on the sidelines and watch the rest of the emerging markets be dragged down by Brazil," said Kristin Forbes, an economist at the Massachusetts Institute of Technology who was, until recently, Mr. O'Neill's top Latin America hand.
Regional contagion played out dramatically Tuesday in tiny Uruguay, where the peso plunged and the central bank closed all banks for the first time in 60 years as it contemplated exchange controls to stem capital flight. Uruguay, which is sandwiched between Brazil and Argentina, floated its currency in June in order to receive a $1.5 billion IMF loan. But its peso has since lost nearly half of its value, and international reserves have dwindled as residents take their money abroad.
Unlike Brazil, Uruguay got a quick endorsement from the Bush administration, implying that it will soon receive further IMF assistance. Washington said it is in close consultations with Uruguay, and the Treasury said in a statement that "the U.S. government stands ready to support additional assistance for Uruguay from the IMF and other international financial institutions."
Brazil's central bank, seeking to regain market confidence and boost its chances for IMF aid, said it will use more than $1.8 billion in foreign-exchange market intervention in August, and raise that figure if liquidity dries up. But the announcement disappointed the market, which was looking for more aggressive intervention. At the same time, many investors are concerned that Brazil doesn't have enough international reserves to defend the real, particularly if Brazilian companies are forced to pay back foreign debt rather than rolling it over.
Write to Jonathan Karp at jonathan.karp@wsj.com1 and Michael M. Phillips at michael.phillips@wsj.com2. |
