FOCUS-Brazil turns to Soros aide amid crisis
By William Schomberg
BRASILIA, Feb 2 (Reuters) - Crisis-torn Brazil stunned markets again on Tuesday when it named its second Central Bank president in three weeks, entrusting its giant but ailing economy to an aide of billionaire speculator George Soros.
Arminio Fraga, a former Central Bank director and until now managing director of Soros' powerful investment fund, rushed from New York to the Finance Ministry in Brasilia, where the International Monetary Fund and local officials were searching for ways to avoid a Russia-style collapse in Brazil.
The battered real currency wobbled on the surprise appointment but staged a healthy recovery, closing at 1.75 to the dollar. That was its strongest level in more than a week, though it was still down 31 percent since Brazil's currency crisis erupted on Jan 13.
Also helping the real on Tuesday were new rules making it easier for banks to sell dollars, traders said.
Economists said Fraga, 42, was a brilliant thinker who would bring priceless experience of working in volatile markets to the government as it scrambled keep a grip on the real and a lid on inflation amid Brazil's worst financial crisis in decades.
''International investors are going to take this news very positively,'' said Walter Molano, head of research at BCP Securities in Greenwich, Conn. ''Arminio Fraga is very well known,
prominent and he has credibility among international economists.''
Some Brazilians worried about Fraga's links to Soros, whose activities have been linked in the past to other countries' currency problems.
''The speculators were so successful in their attack on our currency that they not only devalued the real but they've taken over the Central Bank,'' said Workers Party lawmaker and left-wing economist Aloisio Mercadante.
But Mercadante conceded Fraga would probably manage to stabilize Brazil's newly floated real, an essential first step before the government can cut soaring interest rates to ease a looming
recession and reduce the threat of a debt default.
Soros on Monday criticized Brazil's recent hike in rates to nearly 40 percent a year, calling it a ''disastrous move'' that increased the risk of a devastating debt default.
But people who know Fraga said he would have his own ideas on how the world's eighth-biggest economy should be run.
''You shouldn't confuse George Soros with Arminio Fraga,'' said Paulo Leme, director of emerging markets at Goldman Sachs in New York. ''He has independent ideas that sometimes may coincide with those of Soros but at other times differ radically.''
Fraga's name had been mentioned as a possible adviser to President Fernando Henrique Cardoso, but his nomination to run the Central Bank caught the country by surprise.
Only last week the Senate confirmed Francisco Lopes as president of the Central Bank following the resignation of Gustavo Franco, a key economic policy-maker, on Jan. 13. That was when Brazil tried to stage a controlled devaluation, only to be forced by the markets to float
the currency two days later.
Finance Minister Pedro Malan told reporters on Tuesday he had submitted his own resignation during the crisis but that the president had insisted he stay on.
''I will remain in the position as long as I have the benefit of the president's confidence,'' he said.
Both Malan and Cardoso have been criticized for going back on pledges not to devalue the real. The president -- reelected with a huge majority in October -- has seen his ratings plunge to new
lows in recent opinion polls.
Analysts said the arrival of Fraga might help restore some of Brazil's battered credibility in
international markets.
Lopes was considered a text-book economist but quickly lost face after the Central Bank refused to intervene in foreign exchange markets last week, allowing the real to plunge to 2.18 to the dollar on Friday, when many Brazilians rushed to the banks to pull out their savings.
The powerful president of the Senate -- which has to approve the nomination -- gave Fraga his all-important blessing shortly after the news broke.
''I have known Dr. Arminio Fraga for a long time and I can say that he is extremely competent,''Antonio Carlos Magalhaes, a political ally of Cardoso, told reporters.
Before running the massive portfolio operations of the Soros Fund Management investment fund,Fraga was international affairs director at Brazil's Central Bank between 1991 and 1992 and
was involved in negotiations with the IMF.
One of Fraga's first tasks may be to hammer out an agreement with the IMF over the release of a second $9 billion tranche of international loans to see Brazil through its crisis.
Brazil agreed in November to fiscal and monetary targets in return for a $41.5 billion loan package from the IMF, other international lenders and top industrial nations.
However, the higher cost of Brazil's massive debt mountain resulting from the devaluation has dashed any chance the government had of meeting the targets, which are now being revised.
The talks in Brasilia were also focused on new ways for Brazil to intervene in its foreign
exchange markets to protect the real against the kind of wild fluctuations seen last week.
IMF First Deputy Managing Director Stanley Fischer arrived in Brazil late on Monday to speed
up the negotiations.
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