Brazil will confound the financial analysts again
By Edmar Bacha
Published: August 22 2002 5:00 | Last Updated: August 22 2002 5:00
From Mr Edmar L. Bacha.
Sir, Financial analysts are at it again. Having lost their bets that Brazil would default in 1998, suffer a depression in 1999, and return to hyperinflation in 2001, they are back to their original game - Brazil will default either this year or next.
Brazil will prove them wrong again. At a reasonable 60 per cent of gross domestic product, Brazil's government debt is largely held domestically. This is not Mexico 1994, or Russia 1998, or Argentina 2001, or Uruguay 2002, where most of the public debt was in US dollars or held by foreigners. With the recent International Monetary Fund package, Brazil's government has more than enough reserves to service its foreign debt.
Most of Brazil's external debt is the responsibility of its private sector and nearly all is hedged domestically by dollar-linked notes of the Brazilian government. There will not be any massive private sector defaults because of the depreciation of the Real.
Brazil's currency floats. This is not Mexico 1994, Russia 1998, or Brazil 1998, trying to defend an overvalued currency thus providing an easy way out for investors. If a Brazilian wants to shift his holdings from domestic debt into dollars, he can do so only by finding another investor willing to sell such dollars - and holding Brazil's debt instead. The dollar appreciates but government reserves stay put, and the debt continues to roll over domestically.
Part of the domestic debt is dollar-linked (but paid in Reals), and this goes up when the currency depreciates. It is for this reason that the Brazilian government recently raised to 3.75 per cent of GDP the prospective surplus of its all-encompassing, non-interest budget. More can be done, if the Real keeps depreciating, for Brazil's taxes are a hefty 34 per cent of the country's GDP.
Capital flight is not what explains the sharp depreciation of the Real. Brazilians are free to buy dollars and send them abroad, but this is duly registered in the so-called CC-5 accounts which are used for many other legitimate purposes beyond capital flight.
CC-5 outflows have increased, but only moderately. Foreigners may be surprised, but Brazilians continue to trust that their savings are well protected domestically. The Real is so weak because foreign creditors, decided herd-like to deny Brazil its regular credit lines.
Several adverse factors converged to produce a major credit squeeze for the country. But this cannot force Brazil into a default. If the liquidity squeeze continues, Brazil's Real will remain depreciated and the country's economy will contract, thus generating the perspective of a trade surplus high enough to honour the country's external obligations. Meanwhile, the prices of Brazilian assets will remain cheap. After October, once elections are over the capital outflow will stop and a reverse movement will start. And once more Brazil will disappoint the financial whiz-kids.
Edmar L. Bacha, Senior Adviser, Banco BBA-Creditanstalt, São Paulo, Brazil
<Don't count on Brazil to start the collapse. The risk is not there! And rememeber: USD50 billion out of the US last month. USD200 or was it USD600billion? out of the US taken by the Saudis.
Brazil gains support of bankers over credit
By Jonathan Wheatley in Sa~o Paulo and Gary Silverman and Ellen Kelleher in New York
Published: August 26 2002 23:48 | Last Updated: August 26 2002 23:48
Brazil on Monday received the support of senior executives at Citigroup, JP Morgan Chase, HSBC and 13 other international banks who met Brazilian officials in an effort to help ease a credit squeeze.
In a joint statement, the banks "underlined their long-term commitment to Brazil and their support for the country's economic programme [and] expressed their intention to maintain their general levels of business with Brazil, including trade credit lines".
AND
Brazil gains support of bankers over credit
By Jonathan Wheatley in Sa~o Paulo and Gary Silverman and Ellen Kelleher in New York
Published: August 26 2002 23:48 | Last Updated: August 26 2002 23:48
Brazil on Monday received the support of senior executives at Citigroup, JP Morgan Chase, HSBC and 13 other international banks who met Brazilian officials in an effort to help ease a credit squeeze.
In a joint statement, the banks "underlined their long-term commitment to Brazil and their support for the country's economic programme [and] expressed their intention to maintain their general levels of business with Brazil, including trade credit lines".>
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The collapse will start in the Western Hemisphere. But a little more to the North :-) |
