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Strategies & Market Trends : Telebras (TBH) & Brazil -- Ignore unavailable to you. Want to Upgrade?

To: MGV who wrote (7820)	9/10/1998 10:30:00 PM
From: Steve Fancy	Read Replies (1) \| Respond to of 22640

Brazil raises interest rates to plug dollar outflows Reuters, Thursday, September 10, 1998 at 22:15 SAO PAULO, Sept 10 (Reuters) - Brazil on Thursday raisedinterest rates to nearly 50 percent in a bid to plug massive dollar outflows from its financial markets, the Central Bank said. The Central Bank hiked its basic assistance rate Tban to an annual 49.75 percent from 29.75 percent, a bank spokesperson told Reuters. The move came after Brazil's foreign exchange markets saw a huge drain of dollars, estimated at over $2 billion, on Thursday, after losing more than $8 billion in the first 10 days of September. Stock prices also plummeted on Thursday as panicked investors, worried about the massive capital flight, pulled out of the market. The Sao Paulo stock exchange's key Bovespa share index plunged nearly 16 percent, its biggest one-day drop since October 1987. Copyright 1998, Reuters News Service

To: MGV who wrote (7820)	9/10/1998 10:32:00 PM
From: MGV	Read Replies (1) \| Respond to of 22640

Here is the bearish view on the real: Latin Loot: Panic in Brazil Brings Devaluation Closer By Peter Eavis Senior Writer 9/10/98 4:26 PM ET Brazil, the second largest economy in the Americas, is perhaps only days away from a devaluation that could catapult the country into economic chaos, plunge other Latin nations into recession and ravage stock markets in the developed world. Both foreigners and locals are dumping Brazilian assets and rushing for dollars. The benchmark Bovespa index was down nearly 15% this afternoon, bringing its year-to-date decline to 54%. All Brazil's external dollar bonds were also sharply lower, with the widely followed C-bond falling more than $4.75 to $52 per $100 principal amount. Brazil, which has maintained a dollar-pegged exchange rate as the cornerstone of its four-year-old Real Plan, has suffered capital flight totaling some $20 billion since the beginning of August. Reserves are now down to just $55 billion, according to the central bank. Selling by foreigners is not usually enough to force devaluation. So signs that Brazilians are dumping reals are extremely unnerving. Some banks today slashed to 1.3 from 1.22 earlier this week the rate at which they exchange reals to dollars. The official posted rate is 1.18 reals to the dollar. "Domestic sentiment has turned awful," says a Sao Paulo-based head of research at a Western investment bank, commenting on condition of anonymity. The dash for the exits has sped up even though the government tried to shore up confidence by hiking interest rates 11 percentage points on Friday and announcing sizable budget cuts Tuesday. Some pundits believe that the government of President Fernando Henrique Cardoso, facing national elections Oct. 4, can save the dollar peg by introducing more emergency measures, like further budget cuts and rate hikes. "My gut feeling is that they'll get through," says one sovereign analyst at a well-known rating agency who preferred not to be identified. "Cardoso still has some tools left in the arsenal." He thinks the government will raise rates as high as 40%, from just under 30% now. (Ed. Note: SF just posted news that the GOB raised rates to 50%) The government may also give details of fiscal measures that it would implement early in a second term, which all polls suggest Cardoso will win. However, Cardoso was quoted on Reuters earlier today saying that a further rate hike was not justified. (Ed. Note - He just did it. You can interpret the apparent contradiction a number of ways. The most bullish way: He is choosing to do everything necessary to support the currency and avoid devaluation and is doing it decisively.) The news agency also reported that Cardoso is calling on the Group of Seven rich nations to step in to stabilize world markets. (Ed. Note: This is a cry for help. They had better take this very seriously and respond in substance.) But it seems the Brazilian government has run out of escape routes. On Wednesday, local banks indicated that they would not buy 13-day government real-denominated bonds unless they yielded at least 40% on an annualized basis. Recent bond auctions have been heavily undersubscribed because rates are perceived to be too low at around 30%. The lack of appetite for government paper does not bode well, as the government has 100 billion reals of bonds to refinance by the end of October. But Brazil faces problems even if it does decide to hike rates, since the higher interest costs will add to the already huge fiscal deficit, equivalent to 7.3% of GDP. Extra interest could total $3 billion a month, if the cost of last Friday's rate increase is combined with another hike to 40%. This would push the deficit above 8%, a level that would certainly scare away investors. (Ed. Note: Yes, but if it avoids deval. and capital flight, they can use their foreign reserves for the heightened debt service). The lack of credible options is leading some to wonder whether the government will just go ahead and devalue now, while it feels it still has enough reserves left to defend a new, lower exchange rate. "They must be contemplating carrying out a devaluation soon, before reserves go any lower," says the head of research quoted above. He says the government could still get elected if it devalued, as it could blame the event on external pressures.(Ed. Note: This is highly speculative and exceedingly subjective. I wonder if this bank is short the real? Certainly, Cardoso would have to question seriously the advice that "the government could still get elected ifit devalued." He may be right but, at what cost? I think Cardoso wants to do right by Brazil and will act accordingly.) In addition, Cardoso, perceived by most of the electorate to be a far better economic manager than his rivals, actually generates better poll results in times of crisis. But, in a devaluation scenario, panic could take over and mass selling could prevent the government from exercising any degree of control over the real's rate of decline. In addition, a devaluation would have to be accompanied by sustained high interest rates, which would cripple the banking sector and turn the recession that Brazil already faces in 1999 into a full-blown depression. And if the government shirked high rates, the country could soon return to the hyperinflation of the '80s.