NY Times. Brazil Sees Record Drop in Markets
September 11, 1998
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By DIANA JEAN SCHEMO
IO DE JANEIRO, Brazil -- Brazilian markets, caving in under
the international financial crisis and the government's failure
over the last four years to make crucial changes, careered toward
record losses Thursday, after emergency measures over the last week
proved futile in ending the slide in investor confidence.
As the Sao Paulo exchange fell, whizzing past the 11 percent mark
early Thursday morning and past 15 percent at 4:30 p.m., the market
here halted trading twice in one day, for the first time in its history.
When trading resumed, so did the selloffs, with the market closing
down 15.8 percent.
Standard & Poor's lowered its country rating on Brazil to negative,
putting it in the same category as Jordan, Lebanon, Paraguay and
Bolivia, and as of 6:30 p.m., market sources said $1.7 billion in
foreign reserves had poured out of the country. A week ago,
Moody's Investor's Service also downgraded Brazil.
With the world's ninth-largest economy and half the continent's
population, Brazil is seen as a bellwether for the region, and the
country most capable of ushering in a Latin version of the turbulence
that has roiled Asia and Russia. On Thursday, the selloff was hardly
limited to Brazil. Markets fell 9.8 percent in Mexico, 13.3 percent in
Argentina and 7.4 percent in Chile.
Despite the bruising losses, President Fernando Henrique Cardoso,
who faces re-election in less than a month, struck a defiant note
Thursday, saying no further interest-rate increases and spending cuts
would follow those of the last week.
"We have reached, really, the maximum limit of what's possible to do,
without compromising the activities necessary for the country to
function," the president said in Brasilia Thursday. [Uh, 50% interest rates.]
The government's measures included raising interest rates to 29.75
percent from 19 percent, easing exports and pledges to cut $4 billion
from the budget this year.
Still, confidence in the country's equity and currency markets was at a
low ebb.
"The problem is no longer the stock market," said Andre Zylberberg,
a fund manager at Paradigm Financial Advisers. "It's the fear of
Brazilian investors who are running to buy dollars."
The band between the official and street prices for dollars, around 7
cents last week, widened to 28 cents Thursday, with investors
apparently betting on a devaluation. The dollar was selling at $1.45
reais, up from $1.25 less than a week ago.
Even at that rate, most exchange houses said they were out of dollars.
"The market doesn't believe in the government anymore," said the
owner of one exchange house.
The first sign that the measures were doing little to bolster the
government's credibility came Wednesday, when the government
floated 14-day bonds, withdrawing as banks demanded 34 percent to
50 percent interest. On Thursday, the bonds sold at 31.5 percent.
Cardoso said the country would likely take no further measures to
allay investor panic, which was not limited to Brazil.
"We cannot enter into a game here in which the market imposes and
decides," he said. "There are moments when it is the country that has
to take control and make decisions."
Pedro Malan, Brazil's finance minister, said the country had sufficient
foreign reserves to weather the currency run. Francisco Lopes,
director of monetary policy at the Central Bank, placed reserves at
$55 billion, a drop of $17 billion over the last month.
"It's horrible," said James Barrineau, Latin American equity strategist
at Salomon Smith Barney. "It's piling on at this point. People are all
leaving for the exits at once, and it doesn't help that the Dow is going
down as well."
Inside and out of Brazil, the government is coming under increasing
criticism for Cardoso's failure to pass civil service, social security and
tax reforms during his four years in office.
His economic plan cut inflation from 2,400 percent to about 1 percent
this year, privatized state industries and welcomed direct foreign
investment. But structural changes to reduce government spending
have been left half-done, while the president spent political capital and
time winning a constitutional amendment allowing him to run for
re-election. The budget deficit has been climbing, and is expected to
hit 8 percent of gross domestic product this year.
As the election approaches, Cardoso's chickens are flocking home to
roost at the worst possible time, analysts and industry chiefs said.
"The fact that Brazil has delayed four years, has now, at a very
inconvenient time, forced them to face an unfortunate choice, but a
very clear choice," said Lacey Gallagher, director of Latin America
sovereign ratings at Standard & Poor's. "Either act dramatically to
stabilize the economy now or face some very serious consequences."
Ms. Gallagher said that the government's efforts to restore confidence
have been "piecemeal" at a time when the market was demanding
"more than what's needed."
Jerry Haar, director of the Inter-American Business and Labor
Program at the University of Miami's North-South Center, said the
failure to make government more efficient has not been restricted to
Brazil, and not to the last four years. "Latin American has failed, since
the debt crisis in 1982 and the Mexican peso crisis of 1994, to go the
other 50 yards," he said. "These global trends are showing the
emperor has no clothes."
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