U.S. Rate Cut Would Have Limited Real Impact On Brazil
By MARIANNE SULLIVAN
Dow Jones Newswires
NEW YORK -- A U.S. interest rate cut would help calm global markets
and, by extension, aid Brazil, but analysts warn it wouldn't resolve the
underlying problems of Latin America's largest economy.
The U.S. Federal Reserve's Federal Open Market Committee began
meeting early Tuesday amid widespread speculation that it will lower
interest rates by at least 25 basis points.
A U.S. rate reduction would send out an important signal that the Fed
wants to see more liquidity in battered global markets. Like discussions of
a huge aid package for Latin America, it would help boost the confidence
of international investors in countries like Brazil, economists said.
"It is clear that the international community wants to let everyone know
that it wants to stop the contagion," said Richard Fox, director for Latin
American sovereigns at Fitch IBCA in London.
But economists warn that a U.S. rate cut won't immediately resolve
Brazil's mammoth debt load or skyhigh interest rates.
"Rate cuts alone will not reverse the trend in Brazil. Even if the U.S. lowers
rates, Brazil will still need money from abroad," said Felipe Garcia, Latin
American economist at I.D.E.A. research firm in New York.
The country must roll over about $80 billion of domestic debt by the end
of the year. To halt capital flight, Brazil's central bank earlier in the month
nearly doubled the ceiling on interbank loan rates to almost 50%.
"A rate cut will not affect Brazil's debt, and it is farfetched to claim that,"
said Ernesto Martinez, Latin American economist at Moody's Investor
Service in New York.
Most of Brazil's debt will have to be paid at its high domestic rates. And
these rates, said Fitch's Fox, won't be significantly affected by lower U.S.
rates.
"It won't allow Brazil to lower rates. Brazil's rates are determined by
domestic considerations," Fox said, pointing out that foreigners play a
"quite limited" role in financing Brazil's budget deficit.
Foreigners, said Fox, hold about $5 billion of the country's $350 billion in
domestic debt; the bulk is held by domestic pension funds, mutual funds
and banks.
Still, a drop in U.S. rates would be particularly well-timed for Brazil, which
will hold presidential elections this Sunday.
"A rate cut can get them through the election," said Stephen Jonathan,
director of the foreign exchange desk at Merrill Lynch.
In addition, meetings of the International Monetary Fund, World Bank and
Group of Seven industrialized countries are getting underway in
Washington D.C. this week, and there is much speculation a support
package for Brazil will be on the agenda.
Pedro Perez, Latin American strategist at Barclays Capital in New York,
said a cut itself wouldn't change the overall size of a relief package. "But if
confidence returns to the country, $25 billion to $35 billion may be
enough. If there is still significant risk aversion, more may be needed."
Perez said a U.S. rate cut "will have an effect on global financial
confidence and the stock market. That will hopefully stop the capital flight
from Brazil."
Since the end of July, Brazil's foreign reserves have fallen to below $50
billion from over $70 billion as investors fled the country.
- By Marianne Sullivan; 201 938-4375
marianne.sulliva@cor.dowjones.com |
