Wall Street sees Brazil real devaluing further
Reuters, Wednesday, January 13, 1999 at 14:09
By Apu Sikri
NEW YORK, Jan 13 (Reuters) - Brazil's currency will remain
under speculative attack over the next few days as markets test
the resolve of the Cardoso government to defend the real
following a nine-percent effective devaluation on Wednesday,
Wall Street traders and analysts said.
"What they did was not enough. That is the perception of
most people I've spoken to," said Paul Masco, head of emerging
markets debt trading at Salomon Smith Barney, a unit of
Citigroup. "The move they made today is not sufficient to
regain market confidence," he said.
Currency markets immediately pushed the real to the new
upper limit of 1.32 real to the dollar set by the central bank,
essentially a nine percent devaluation.
Traders said Brazil would likely be forced to devalue
further, sliding into a currency crisis similar to the one
faced by Mexico in 1995 and Asian countries more recently.
"Holding the currency at these levels will be very, very
difficult. In an unclear policy environment, devaluation begets
devaluation," said Robert Smalley, emerging markets strategist
at HSBC Securities.
Brazil's central bank widened the currency band after
nearly $2 billion in dollars flowed out of the country earlier
this week. On Wednesday, Brazil reportedly bled another $1.5
billion dollars after the devaluation announcement despite
central bank selling of dollars.
The central bank was also seen buying stocks to prop up the
stock market, traders said. The blue chip Bovespa index, down
more than 10 percent early in the day, was down nearly six
percent mid-afternoon on Wednesday. Brazil benchmark "C" bonds
were down five points to 50-1/8.
Brazil Finance Minister Pedro Malan said the new exchange
rate regime would allow for lower interest rates, currently
around 30 percent.
But many market participants doubt interest rates will
decline so long as expectations of another devaluation remain.
"Rates are high because people expect a devaluation.
Interest rates will come down only when there is credible
evidence that you won't have another (devaluation)," said Paul
Dickson, analyst at Lehman Brothers Inc.
Interest rates will likely remain high so long as Brazil
follows a policy of managing the currency, investors said.
"This move does little to address the risk premium in
domestic interest rates associated with a managed crawl," said
Michael Cembalest, portfolio manager at J.P. Morgan
Investments.
"When you have a managed crawl system, you buy yourself an
option, and the premium you pay for that option is irrevocably
high interest rates," said Cembalest.
High rates could in turn force the government of President
Fernando Henrique Cardoso to negotiate a rescheduling of
payments on domestic debt, currently more than $300 billion,
investors said.
"We would be more optimistic the day we see a restructuring
of domestic debt that would assure the liquidity and capital
adequacy of the banking system," said Cembalest.
Brazil abandoned a long-standing policy of a strong real
when it effectively devalued the currency Wednesday.
Copyright 1999, Reuters News Service
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