Must-read. WashPost. From Global Markets to Local Stocks, a World of Concern Brazilian Stocks Plummet, Viewed As Major Concern
[Note: Cramer (thestreet.com) has written in the past that John Berry is THE writer he follows about Fed Reserve moves because Berry has the best contacts. Ron Insana on CNBC just reported rumors that Fed officials met yesterday with US bankers about what needed to be done. And, remember, Greenspan testifies before the House Banking Committee on Tuesday. I strongly believe things are in the works. Any ideas?]
washingtonpost.com
By John M. Berry
Washington Post Staff Writer
Friday, September 11, 1998; Page F01
Financial markets in Latin America and some other parts of the developing
world plunged into virtual free fall yesterday -- with Brazil the hardest hit --
as global investors continued to pull their money out of areas they fear are
growing riskier.
Brazil's key stock price index, the Bovespa, closed down 15.8 percent
despite two trading halts, and already-high interest rates were raised again
to try to protect Brazil's currency, the real.
Meanwhile, Mexico's main stock index, the Bolsa, fell 9.8 percent as the
value of that's nation's currency, the peso, hit an all-time low of 10.6
against the dollar.
U.S. financial analysts and policymakers regard Brazil, the largest economy
in Latin America, as on the front line in the battle to stabilize world financial
markets and prevent global economic turmoil from spreading to the United
States.
A recession and currency devaluation in Brazil would cause heavy losses
for U.S. lenders and exporters, and possibly drag down the economies of
other important U.S. trading partners in the region.
"Latin America is teetering on the brink," said Bruce Steinberg, chief
economist at Merrill Lynch & Co. in New York.
The Brazilian currency is under pressure from a huge outflow of capital that
could force a devaluation and unleash another wave of market turmoil that
would drag down not only other Latin American currencies but perhaps
the Hong Kong dollar as well.
That concern was underscored by a senior Treasury official who said
yesterday that he and others "have been in close contact with our
counterparts in Brazil and other Latin American countries today. These
countries have made great progress in economic reform in recent years,
and it is very much in our interest to be supportive of the reform efforts of
these nations, which mean so much to our economy."
"If the real were to crack, a Brazilian and regional recession would ensue,"
Steinberg said.
Merrill Lynch has lowered its forecast for Latin American economic
growth to 2 percent next year from 3.5 percent, Steinberg said. He added
that the forecast assumes that Brazil will be able to sustain the value of the
real within its current "crawling peg," a process in which the authorities
allow a gradual depreciation.
A variety of U.S. companies would be hurt by a Brazilian devaluation and
recession. According to the Federal Reserve, U.S. banks had more than
$19 billion in loans and other claims in the country at the end of March, the
last month for which figures are available. And in the first half of this year,
U.S. firms exported more than $7 billion worth of goods and services to
Brazil.
If the Brazilian economy falters, the demand for U.S. exports would shrink
and some borrowers proba bly would be unable to repay their loans on
time.
The exposure of large U.S. banks in the region -- they had more than $10
billion on the line in Argentina in March -- -- is one reason the price of
their stocks have plunged by 30 percent to 50 percent in recent weeks,
analysts said.
For the Brazilians, dealing with the crisis is greatly complicated by the fact
that President Fernando Henrique Cardoso faces the voters in a reelection
bid Oct. 4. His government is attempting to avoid a devaluation, or
perhaps some type of currency controls, until after the election, when other
policy changes such as large spending cuts could be proposed instead.
Overnight interest rates, which the central bank already had boosted
sharply in an effort to keep money from fleeing the country, were raised
another notch, to more than 31 percent. Bond prices tumbled as Standard
& Poor's Corp. warned it may cut the government's credit rating, as
Moody's Investors Service Inc. did last week.
The outlook in Brazil is so uncertain that yesterday the government, which
must borrow to finance a budget deficit equal to more than 7 percent of the
nation's gross domestic product, couldn't find buyers for a large bond
issue.
Meanwhile, the Mexican peso's drop occurred despite intervention by the
Bank of Mexico, which sold dollars for pesos to prop up the latter's value.
Some Mexican analysts said that events in Brazil were hurting Mexico
through what is known as the contagion effect, with investors treating
developing countries as all the same even when their economic
circumstances and government policies may be quite different. Even
interest rates of up to 40 percent on Mexican government securities
maturing in only four weeks has not stopped the rush of investors to safer
havens.
Robert Dugger, managing director of Tudor Investment Corp., said the
upheaval in world markets, including the United States, has left "financial
institutions of every kind scaling back risk wherever they can. That means
that they have to discriminate among the strong, the near-strong and the
weak.
"Brazil looks like one of the near-strong. Even though it has many positive
characteristics for investors, it's not in the 'strong' category," Dugger said.
"In a world in which investors are selling everything and moving to
Treasury securities, Brazil gets sold right along with IBM's long-term debt
and General Electric's long-term debt."
The process of reducing risk makes sense, he argued. With world
economic growth slowing, there "is going to be less income to support the
debt of Brazil. So the market reprices everything," including the Brazilian
debt, which now carries more risk than it did last year or last month,
Dugger said.
Perhaps Brazil's greatest problem is its debt -- both that it has so much and
that the total is rising rapidly, with the government's budget deficit likely to
exceed $50 billion this year.
In the short run, the government has to find investors willing to buy $80
billion in new bonds that must be issued over the next two months to repay
holders of maturing bonds.
The outflow of capital is running at more than $1 billion a day, according to
estimates by foreign exchange experts. The Brazilian central bank
announced that its foreign currency reserves have shrunk by one-quarter,
to $55 billion, since Aug. 1.
c Copyright 1998 The Washington Post Company
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