Investors wary of market complacency about Brazil
10:29 a.m. Jan 11, 1999 Eastern
By Andrew Priest
LONDON, Jan 11 (Reuters) - Financial markets seemingly sanguine view of
Brazil's new year political standoff probably underestimates the risk to the
country's anti-crisis austerity plan and to global markets in general, investors
said on Monday.
The internal political feud was sparked last week when Minas Gerais, Brazil's
third richest state, announced a 90-day moratorium on its debt payments to
federal government at a time when Brazil's creditworthiness is under intense
scrutiny.
Brazil's second wealthiest state, Rio de Janeiro, said subsequently that it also
wanted to renegotiate its debt to central government.
Yet despite the possibility of an escalation in Brazil's economic woes, fund
managers said global asset markets were pricing in little risk of an Asia-style
meltdown, focusing instead on strong new year rallies in major equity markets.
''If global markets appear complacent it's not because people have decided
Brazil will be all right but because it's just not been properly considered yet,''
said Robin Garrow, global equity strategist at Scottish Widows Investment
Management in Edinburgh.
''There seems to be more risk there than the market is allowing for and this sits
uneasily in my book with the kind of exuberance we have been seeing recently
in the European and especially the U.S. market,'' said Garrow.
Brazil's success in adopting a belt-tightening national austerity plan is a
precondition for the release of a $41.5 billion rescue package agreed with the
International Monetary Fund last November.
Moreover, any deterioration in the financial position of the world's ninth biggest
economy would have a direct impact on U.S. growth and confidence due to the
strong economic and financial links between the two countries, analysts said.
''We're going grey waiting for the U.S. economy to weaken,'' said Garrow.
''But as nothing is happening now to improve the situation there, at some point
it is likely to hit a brick wall and Brazil could be the catalyst,'' said Garrow.
Andrew Brunner, global strategist at Aberdeen Asset Management, said global
markets were choosing to look the other way with regards to Brazil, in sharp
contrast to the rush to unload risky assets at the first sign of trouble last year.
''At the moment people are not too concerned that (the moratorium) is going to
throw the whole thing off course,'' he said. ''But if Brazil cannot meet what the
IMF requires of them, then we are suddenly talking about something potentially
a lot more serious.
''However there is so much liquidity out there looking for a home that people
are just following momentum at the moment.''
The Brazilian state's debt moratorium was cited as a factor in the dollar's fall last
week as well as a slightly weaker tone in emerging market debt prices. But the
announcement of the payment freeze did little to unsettle U.S. and British equity
markets, which both roared to all-time highs.
Rating agency Fitch IBCA told Reuters earlier on Monday the impact of the
debt moratorium on Brazil's credit rating would be difficult to gauge until fiscal
data up to the end of December was released next month.
Richard Fox, director of Latin American sovereign ratings at Fitch IBCA in
London, said markets could be volatile until the release of the data, which will
indicate whether the country is likely to meet the IMF's conditions.
''At this stage, the government has signed up to very ambitious targets, but the
problem is that's all we've got,'' said Fox.
The stakes for foreign investors were raised after the governor of Minas Gerais
said on Saturday that his state may not pay interest and principal on its
Eurobonds if local spending needs could not be met.
Minas Gerais has a $100 million Eurobond maturing on February 10. It must
also make a coupon payment of around $8 million on a $100 million Eurobond
maturing in 2000 on the same day.
The federal government's row with the state is seen as a worry for investors
because the government needs the support of the state governor's Brazilian
Democratic Movement Party to ensure a smooth passage for its anti-crisis
legislation through Congress.
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