BRASILIA (Reuters) - Brazil gave up defending its cherished currency on Friday, bowing to
overwhelming pressure to let the inflation-busting real float in a move that international markets
hoped might yet save the world's eighth biggest economy.
The real, cornerstone of a five-year plan that dragged Brazil out of decades of economic chaos,
plunged immediately to a low of 1.55 to the dollar before clawing back to 1.47, a roughly 12 percent devaluation from
Thursday's close of 1.32.
World markets had long feared a big devaluation in Brazil might wreak havoc on global growth, but with Friday's move they
celebrated what they saw as the country's best chance of avoiding financial meltdown.
Finance Minister Pedro Malan and Central Bank President Francisco Lopes were due to fly to Washington on Friday in a bid
to secure support from the U.S. government and the International Monetary Fund.
Brazil attempted a controlled devaluation on Wednesday when it allowed the real to fall more than 8 percent against the dollar.
But the Central Bank on Friday abandoned attempts to keep it in a new band as billions of dollars flooded out of the country,
running currency reserves down to about $40 billion.
Amid initial relief that Brazil had finally yielded to pressures to let the real float before blowing all its reserves, shares in Sao
Paulo soared 27 percent, recovering some of recent steep losses, and Brazilian bonds rebounded in London and New York.
The Dow industrials index of shares in New York, which dipped this week on fears that a crisis in Brazil could hurt the United
States' hefty exports to Latin America, was up 1.7 percent and Latin American stock prices also snapped back.
''The fact that one of the biggest countries in the world ... has taken this decision, represents for all of us a very important and
very positive piece of news,'' Mexico's Finance Minister Jose Angle Gurria told Reuters in Mexico City.
The dollar also soared against the yen and the euro.
Friday's fall in the real meant the currency had devalued about 18 percent from Tuesday's old limit of 1.22 to the greenback,
cutting the spending power of 160 million Brazilians by nearly a fifth in just three days.
President Fernando Henrique Cardoso's popularity is closely linked with the success of the real currency that has transformed
Brazil from a basket case economy just five years ago to a budding regional superpower.
Cardoso was returning by helicopter from a day's rest at his farm and was due to meet with Finance Minister Malan and
Central Bank President Lopes to discuss their mission to Washington.
A government official told Reuters that depending on the outcome of the talks in Washington over the weekend, Brazil might try
to defend its currency again next week.
''It's one thing to try and do something like this on your own. It's different when you do it with support,'' the official said, asking
not to be named.
The IMF's First Managing Director Stanley Fischer said it was too early to assess the likely impact of the Brazil's float.
Brazil's financial crisis was due to be discussed by deputy finance ministers from the industrial G7 nations who were due to hold
a previously arranged meeting in Germany on Saturday.
''I am very concerned about the Brazil situation. A solution has to be found quickly as there is the danger of contagion due to
the Brazilian crisis,'' German Deputy Finance Minister Heiner Flassbeck said in Frankfurt.
In a statement, the Central Bank said it would not intervene in the foreign exchange markets on Friday and would set new
foreign exchange rules on Monday. It did not go into details.
''The Central Bank had to do this because it had no other way to manage the currency,'' said Jaime Alves, an economist at
Banco Patente in Sao Paulo.
Brazil introduced the real in 1994 after decades of soaring inflation and the currency has served as the anchor of Brazil's
economic recovery since then.
Latin America's economic powerhouse averted a near-devaluation last September after being buffeted by financial storms from
Russia's economic collapse and swirling crises in Asia.
But the pressure became unbearable this month after former President Itamar Franco, now governor of Minas Gerais state,
declared a temporary moratorium on the state's debt to the federal government.
Alves said Brazil could avoid the fate of Mexico, which tried a controlled devaluation in December 1994 but saw it career out
of control, because Brazil still had foreign reserves of about $40 billion.
''I think that the Central Bank may intervene at a certain level that it thinks is good for the real and not let it explode. Maybe at
1.60,'' Alves said.
There was some good news for the Brazilian government on Friday when leading international telecommunications and utilities
companies bought two telephone concessions and announced massive investments in the country.
''We are absolutely confident, we are certain that this problem will pass,'' said Almeida Rodrigues, president of the local
subsidiary of U.S. telecommunications firm Qualcomm Inc. (Nasdaq:QCOM - news) ''People who invest in
telecommunications aren't thinking in the short term, they're thinking over the next 15 or 20 years.'' |
