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To: Rarebird who wrote (39291)	8/19/1999 5:35:00 PM
From: Alex	Respond to of 116950

Brazil's Currency Sinks to Crisis Levels on Political Jitters Sao Paulo--Aug. 19--Brazilian central bank measures announced on Wednesday to ease pressure on the country's currency are proving insufficient. The real today plunged to 1.925 per U.S. dollar, prompting dollar sales from the authority, traders say. Market players have doubts about President Fernando Henrique Cardoso's ability to hold the governing coalition together and push much-needed fiscal and structural reforms through Congress. These measures are key to reining in the country's runaway fiscal deficit. The fears are driving rampant demand for U.S. dollars as a foreign exchange hedge, thus weighing the real down. The real opened under pressure today and dived to as low as 1.925 per dollar, a level not seen since the height of the devaluation financial crisis in early March. Traders say the tumbling currency triggered dollar sales from the central bank for a second consecutive day, although the institution will not confirm any intervention until after the close of trading. The source of Brazil's long-range macroeconomic weakness continues to be fiscal policy. Federal and state governments have committed to deep spending cuts and tax reforms in order to meet tough budget surplus goals, targets set in stone in an accord with the International Monetary Fund. In recent days, however, worries that the authorities lack the discipline to stick to the austerity measures have escalated. Congress defied Cardoso yesterday by agreeing to an early vote on a potentially expensive debt-renegotiation bill with farmers. The President says he will veto the bill, which seeks to slash farm debts by up to 40%, explaining that it would cause deep losses to government lending agencies. Farmers remain camped out in Brasilia to keep up the pressure on the government. Investor jitters were also heightened when the government agreed to a tax incentive plan for auto makers. Moreover, opposition lawmakers have had more success than usual in tripping up key fiscal and tax reforms. The pressure will rise even more when a planned "March of the 100,000" converges on Brasilia on Aug. 26 to demand jobs and more social spending. Such demands come at a time when Cardoso's popularity has plunged to below 20%, and his reaction to the escalating situation has been considered weak. According to analysts, the political risk factors are now higher than normal: A weak President could be tempted to give in to the spending demands, thus leading to a breakdown in the IMF agreement. "Everyone in the market is looking for an forex hedge," says one analyst, which a trader sees as "a clear sign of insecurity." In response to the tumbling real, central bank President Arminio Fraga announced measures on Wednesday aimed at increasing the supply of U.S. dollars to the foreign exchange market. The institution eliminated the IOF financial operations tax on foreign capital entering the country and doubled government export financing terms to 360 days. However, the market is skeptical about the measures' effectiveness. Joao Medeiros, a director with the Pioneer brokerage, says the stop-gap move will do little to increase the supply of dollars. "The problem is that we don't have much else to export. Practically all of the agricultural harvest has been sold. I don't see people bringing forward export contracts for next year's crop." Moreover, the IOF's elimination will fail to lure foreign capital into Brazil as perceived risks are currently very high. "Who's going to leave the safety of the U.S. just to put their fingers in the guillotine?" he asks. A trader adds that there is little Fraga can do to support the real: "We need to see action from the President." By David Warwick, BridgeNews businessweek.com