Idea of the day on Brazil -- "Parallels drawn with Russia are wrong. Practically all Brazil's domestic debt is owned by domestic investors and so the government doesn't face the danger that foreigners will pull their capital out all in a rush," said Peter West, chief
economist at BBV Securities in London.
So does this mean that supports are buying opportunity...!!
Now I take you to an observation very relevant by Krugman..
''On a recent visit to Australia I had a fairly spooky conversation with some government
officials.
Australia, in case you didn't know, is the miracle economy of the world financial crisis. Even though
most of its exports go either to Japan or to the stricken tigers, Australia has managed to ride out the
storm so far without even a serious slowdown. The key to this resilience has been a policy of benign
neglect toward the exchange rate: instead of raising interest rates to defend the Aussie dollar, the
central bank allowed the currency to slide, from almost 80 U.S. cents in early 1997 to the low 60s
by the summer of 1998. The result was that while export prices plunged in U.S. dollars, they held up
in local currency, and strong domestic demand kept the economy humming.
Luckily, financial markets apparently decided that the decline in the Aussie dollar - unlike, say, the
decline of the Indonesian rupiah - represented a buying opportunity rather than a foretaste of things
to come. As a result, the currency stabilized itself instead of going into free fall. But there have been
some anxious moments. In late August, in particular, it began to look as if the Aussie dollar was
going into free fall after all: day after day it fell, reaching a low of barely 56 cents. If it had kept on
falling, the Reserve Bank might have had to raise interest rates after all.
What was all that about? Well, the officials I talked to confirmed what I had guessed: a lot of the
plunge had to do with hedge funds shorting the currency. But what I didn't know was that some
people from the hedge funds actually told the Australians, in effect, that resistance was futile - that
they were only a small piece of a coordinated play against Australia, New Zealand, South Africa,
and Canada - not to mention Hong Kong, Japan, and China.
Was this just boasting? There is no question that last summer a number of hedge funds did, in fact,
bet on the proposition that a lot of dominoes were about to start falling: that the yen was going to
plunge, dragging down the HK dollar and the renminbi with it, or vice versa, and that the currencies
of commodity-exporting countries like Canada and Australia would get dragged down by the
backwash. It is less certain whether the hedge funds were actually the dominant source of
speculation against the potential dominoes. And whether they acted collusively is hard, perhaps even
impossible to know: if there was collusion, it could have been tacit, a matter of carefully phrased
generalities uttered over a bottle or two of expensive wine.
Of course, if there was a conspiracy, it failed. In fact, if you wanted to make up a supposed secret
history of world financial markets over the past 6 months, it would go like this: during the summer a
few big hedge players - let's call them the Relativity Fund and the Pussycat Fund - agreed to stage a
run on Asia plus. They acquired huge sums of cash by borrowing in yen, shorting Hong Kong
stocks, getting Australian credit lines, etc.; then they began ostentatiously selling all of the target
currencies, spreading rumors about imminent Chinese devaluation, and so on. Meanwhile they put
the borrowed money into various high-yielding assets, including things like U.S. corporate bonds and
mortage-backed securities, and also some risker things like Russian GKOs. But somehow it all went
wrong: Hong Kong refused to play by the rules, then Russia fell apart, and investors around the
world got more risk averse. Suddenly the funds found some of their credit lines pulled. And since
they had become such gigantic players, this started a sort of cascade of margin calls: for example, as
Pussycat began to unwind its yen shorts it drove up the value of the yen, causing losses that forced it
to unwind even more. And correspondingly, of course, the assets the funds had been buying - like
non-investment grade dollar bonds - plunged in value.
In short, all the strange things that have happened these last few months - including the bizarre runup
in the yen and the mysterious near-collapse of U.S. financial markets - are, according to this story,
the byproduct of the ravelling and unravelling of a vast get-rich-quick scheme by a handful of
shadowy financial operators.''
All this means that like Australia, Brazil may come out of this good and in absence of greedy money minded FM's we are not facing a similar crisis like the one in Sept 98... With best regards to everyone..Ike
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