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Strategies & Market Trends : Waiting for the big Kahuna
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To: William H Huebl who wrote (27512)9/12/1998 8:58:00 AM
From: flickerful  Read Replies (1) of 94695
 
commentary. brazil devaluation?
ft
9.12.98

BRAZIL: Threat of devaluation

By raising interest rates to nearly 50 per cent, Brazil has temporarily staved off the threat of devaluation. With the country's foreign reserves, previously seen as its main buffer against a full-blown crisis, depleting at a rate of more than $1bn a day, something had to be done to stop the capital flight.

But high rates on their own will not be enough. Drastic action is needed to tackle the underlying fiscal deficit. The recent combination of piecemeal fiscal measures and tight monetary policy is failing to put an end to the red ink: the spending cuts are disappearing into the hole of higher interest costs on Brazil's $300bn of domestic debt.

President Fernando Henrique Cardoso is in a tricky position. The sort of bumper fiscal package needed - even if he took the political risk of announcing it ahead of next month's election - would have to be approved by the new government.

Appeals for foreign support may also be doomed. Brazil would probably benefit from a US-led international bail-out, allowing it to refinance its massive burden of short-term debt. But, given the crisis in the White House, the Clinton administration is hardly likely to risk pushing a potentially expensive and controversial plan to help a country most Americans do not care about.

The best Brazil can hope for is that Mr Cardoso will win the election, rapidly implement a big fiscal package and refinance its debt.

But given the financial turmoil elsewhere in the world, a forced devaluation cannot be ruled out.
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