B. Stearns fears 'severe devaluation risks'
São Paulo, 29 - Commenting on Brazil's fiscal adjustment program in its Latin
America Watch report, the investment banking and securities and trading brokerage
firm, Bear Stearns, said the institution expects President Fernando Henrique Cardoso
to succeed, but recognizes "severe devaluation risks as the economy contracts under
the weight of high interest rates (currently at nearly 50% yearly), tax increases, and a
discretionary monetary policy".
David Malpass and Jennifer Woolman, author's of the bank's report, wrote that Brazil
faces a prolonged fight to preserve its currency, the real, and the economic program.
"As the recession deepens, the markets will test Cardoso's resolve, watching to see
when and how he confronts congress, the states, and the devaluations."
The authors of the report went further explaining why the domestic financial markets
are reacting negatively to yesterday's fiscal announcements. According to them, there
are four main reasons for that to occur: "Concern that Brazil's Congress may not act
promptly, Wednesday announcement that the IMF program could take as much as a
month to finalize, difficulty in using tax increases to try to reduce a budget deficit
during recession, and guarded reactions from the US and the IMF."
The report informed that Brazil's Financing minister, Pedro Malan, said that Congress
should begin voting the remaining Social Security reforms next week, but the bank
sees that with skepticism. "Assuming that the process is successful, Congress would
still need to take up the regulations regarding administrative reforms, the 1999 budget,
and the extension of the FEF financial stabilization fund," the report concluded. (By
Paulo R. Monteiro Dias)
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