Brazilian Investors, Not Foreigners, To Seal
Country's Fate
By CAROL S. REMOND
Dow Jones Newswires
NEW YORK -- Domestic investors and their confidence in President
Fernando Henrique Cardoso will determine whether Brazil's current
market instability escalates into a full-fledged crisis, analysts say.
Markets at the moment are focusing on prospects for an international aid
package for the Latin American giant's besieged economy. The
International Monetary Fund has said it will pitch in $15 billion for Latin
America if needed, and other institutions are also apparently considering
putting up funds.
But regardless of what foreign institutions and investors opt to do, it's likely
to be Brazilians themselves who determine the outcome of this market
turmoil.
Brazil must roll over an eye-popping 100 billion reals in short-term
domestic debt before year-end, according to analysts' estimates and
government figures; the total stock of local debt outstanding tops 300
billion reals.
"It's pretty clear that Brazil has been talking to the International Monetary
Fund and that the U.S. Treasury is also looking at something. But the issue
is whether or not Brazil will be able to roll over securities locally," said
Paul Dickson, Lehman Brothers' emerging market strategist.
"Locals will be key. If they believe the government, everything will be okay
and the capital outflows will stop," agreed David Harding, a portfolio
manager at Nicholas Applegate.
Although some are quick to draw parallels between Brazil's massive local
debt and that of Russia, foreigners hold only about 10% of the Latin
American country's domestic fixed-income instruments. In Russia,
foreigners were caught holding 25% of local debt when the government
announced in August that it would restructure its Treasury bonds.
Stressing the severity of the situation, Bank of America last week wrote in
a report that "the piling up of short-term debt is a fundamental problem
that the government can only deal with with a major fiscal adjustment, or
worse a devaluation."
So far in August and September, almost $20 billion have fled Brazil's
capital markets, quickly bringing reserves to about $49 billion. This month
alone capital outflows total about $15 billion, with $224 million exiting
Thursday.
And although Brazil has so far been able to meet its financing needs
primarily through its domestic markets, analysts are beginning to question
the viability of that policy.
A total of $33 billion in short-term domestic debt is due to mature in
September, with an additional $47 billion coming for redemption in
October, and about $10.25 billion in November and December. Brazil
also needs to make a little over $2 billion in payments on its international
debt obligations, including Brady bonds and Eurobonds.
The Treasury opted to cancel its regular domestic debt offering this week,
foreseeing demands for prohibitively high rates. The previous week, the
Treasury placed only a fourth of the 266-day paper it was looking to sell.
After the market closes Friday, the Treasury will publish the tender for
Tuesday, signaling whether it's willing to brave capital markets next week.
Determined to defend its currency, Brazil late last week raised the ceiling
on its interest rates to 49.75% - so far they have climbed to about 40% -
and said it would cut government spending.
"As investors perceive higher interest rates as a signal of difficulties in
rolling over local debt both foreigners and locals will exit the market,"
Bank of America said in its report.
To be sure, foreigners also will play a role. According to Bank of
America, $15 billion to $20 billion in foreign money invested in
real-denominated instruments could flee Brazil. |
