Brazil is the tail that wags the dog. The US can't afford Brazil to do an Argentina. That means disater has been averted, for the moment. But hey, we know Brazil, don't we?
Markets cheered by $30bn Brazil bailout
By Chris Giles
Published: August 8 2002 19:02 | Last Updated: August 8 2002 19:02
Financial markets delivered a positive verdict on the International Monetary Fund’s record $30bn rescue package for Brazil, with a large gains in Brazil’s currency and bond prices and in the share prices of companies with exposure to the country.
Confidence was further boosted when the main candidates in Brazil’s forthcoming presidential general election offered their preliminary support for the package.
Policy makers hope that such a strong display of support for Brazil will shore up confidence in Latin American economies, which have recently been plagued by international investors' aversion to risk.
Across the Latin American region domestic currencies have been falling and interest rates on government debt rising, causing concern that the fallout from Argentina's debt default and devaluation of its currency last year would finally spread to other countries.
Under the agreement with the IMF, Brazil has committed to maintaining a budget surplus of 3.75 per cent of gross domestic product. If the winner of October’s election cannot meet that pledge, then most of the IMF credit effectively would be forefeited, as 80 per cent of the funds available won't be available until 2003.
In Brazil, Jose Serra, the government candidate and leading proponent of economic continuity, fully endorsed the agreement as expected. Of more importance to financial markets was the reaction of the two leading opposition candidates.
Luiz Inacio Lula da Silva, of the leftwing Workers Party, signaled his support in principle on Thursday morning. "I approve Brazil drawing on those funds because it needed to. It brings renewed investor confidence and that is important," he said.
Ciro Gomes, candidate of the centre-left Workers Front and currently placed second in the polls, said before the deal was announced, "I would be the last to obstruct the negotiations between the government and the IMF."
Those words were enough to cheer investors. The Brazillian real rose by more than 5 per cent to R$2.87, breaking through the R$3 barrier for the first time since July 26.
The average yield of Brazilian debt compared with US Treasuries fell by about 2 percentage points. Companies with heavy exposure to Latin America also saw large increases in their stock prices. The Spanish equity market closed up 5 per cent.
However not all reactions to the IMF's bailout were positive. Some analysts thought the bailout would only prolong Brazil's agony before an inevitable default. “The IMF package authorised the outgoing administration to strip clean the central bank vaults and leave the bill to the incoming team. The probability of default is now higher than it was before,” said Walter Molano of BCP, a Connecticut securities group. |
