LA Times article. $26B line of credit
Rallying Respond to Global Crisis. Latin America: Markets soar on optimism that West will come to the rescue with an aid package
latimes.com
Wednesday, September 16, 1998
By CHRIS KRAUL, JAMES F. SMITH, Times Staff Writers
Latin American stocks skyrocketed Tuesday on optimism that the United States
and other Western nations will soon offer a multibillion-dollar aid package to
shore up the region's beleaguered currencies.
Brazilian stocks rose nearly 19% in their biggest single-day rally in three years, and
Argentine stocks soared 8.9%, posting their biggest one-day gain since March 1995.
Mexico's benchmark stock index, meanwhile, posted its biggest leap in a decade, gaining
12.9%, as the peso also rose to a seven-day high.
Markets were boosted by the likelihood of a bailout package that, according to
Brazilian Finance Minister Pedro Malan, could take the form of a $26-billion line of credit
from the International Monetary Fund and Group of 7 industrialized nations. Earlier
Tuesday, the World Bank said it would also contribute.
Such a bailout could reverse capital flight and restore confidence in stock markets that
have been battered in Brazil and other Latin American countries since Russia's default
and devaluation in August. Brazil, the world's ninth-largest economy, has spent more than
$25 billion to defend its currency since Aug. 1.
Although its stock market has rallied this week, Brazil's benchmark Bovespa index is
still down 36% since Aug. 1. Brazilian 10-year government bonds now carry interest
rates of 17.3%, or 12 percentage points higher than interest on comparable U.S. notes.
That spread shows the risk that investors see even in Brazil's sovereign debt.
The steady capital drain and investor flight is increasing the probability that a Brazilian
devaluation could occur. Worries over how that could harm neighboring economies and
repercussions for the United States have led to an attitude shift within the global financial
community to urge intervention. Aid could take the form of a credit line, a lowering of
interest rates or both. Tuesday's market spike reflects the expectation that some act of
intervention will be taken soon.
"People are optimistic that somebody might be coming to the rescue," said Michael
Henry, Latin American economist at ING Barings in New York.
* * *
The optimism may be premature, however. Although the U.S. and other industrialized
nations agree that aid is needed to stave off an emerging-market collapse, there is no
accord on what shape an aid package may take, Malan's remarks notwithstanding.
In fact, Brazil's president denied late Tuesday that the government has requested aid.
Henry said the stock market rally of the last three days will be short-lived unless some
package materializes soon.
Meanwhile, capital continued to flow out of Brazil on Tuesday, with $335 million
leaving the country, according to preliminary figures.
"What we're seeing is not some ringing endorsement of Brazilian economic policy.
Until we see overall that these things come to fruition, it will be hard to sustain a real
rally," Henry said.
Brazil's market chaos was the cause for Tuesday's disappointing privatization of a
state-owned power generation utility, Gerasul. The utility sold at the minimum bid of $801
million and only one bidder, Belgium's Tractebel, made an offer.
At least two U.S. companies, AES Corp. of Arlington, Va., and Southern Co. of
Atlanta, backed away after first showing interest.
Brazil had hoped for a premium of as much as 35% over the $801-million minimum,
said Santander Investments analyst Alexandre Braghetta in Sao Paulo.
This is the first of as many as 10 power-generation utilities that the government will
auction off over the next year or so.
Looking on the bright side, the government was lucky that the auction came off at all,
said Sandra Boente, a Latin America utility analyst with Salomon()
Smith Barney in New York.
"The possibility of a devaluation makes a utility less attractive because it is by nature a
business in which there is a time lag between a rise in costs and the ability to collect those
costs from ratepayers," she said, adding that a devaluation would produce inflation and a
resulting upward spiral in costs.
In Mexico, as millions of people prepared to celebrate independence day today,
analysts welcomed a surge they hope signals a real shift in market sentiment following the
international community's pledges of support.
Analysts said the market was buoyed by a preliminary agreement Monday by
Mexico's main political parties on a process to resolve the nation's bank rescue program.
The parties have been wrangling for months over how to pay for the $55-billion bailout of
the banks following Mexico's own financial crisis in 1995. Now it looks like an accord
can be reached within a few weeks.
* * *
With Mexico's fundamentals regarded as healthy, the bank bailout dispute is one of
the few internal factors affecting investor confidence.
U.S.-traded Mexican stocks recorded huge gains Tuesday as investors piled in.
Telmex, the phone monopoly, surged nearly 15% to $42 on the New York Stock
Exchange(). Grupo Televisa soared 19.2% to $18.63.
The peso, meanwhile, strengthened for a second day, up 1.5% to 10.17 to the dollar
from 10.33 on Monday and the record low of 10.60 on Friday, but it is still off more than
25% of its value since the start of the year.
The Mexican stock market remains down 35% this year, after its 52% rise in 1997
made it one of the world's most attractive emerging markets.
The Mexican central bank has taken a series of tough steps to reduce the nation's
money supply and protect against inflationary pressures caused by a weaker peso.
As a result, interest rates have more than doubled. Rates on 28-day Mexican treasury
bills soared by 10 percentage points at Monday's weekly auction, to 47.68%.
While analysts have applauded the anti-inflation measures, they worry that the high
interest rates--if sustained for long--will dampen economic growth and put the already
anemic banking sector under further pressure.
* * *
Latin Stock Plays
Huge gains in battered Latin American stock markets on Tuesday were reflected in
their U.S.-traded shares. A sampling of Latin American stocks and closed-end mutual
funds traded on the New York Stock Exchange:
Ticker 52-week Tuesday
Stock symbol High Low Close Change Pct. chg.
Grupo Simec SIM $7.44 $1.63 $2.13 +$0.50 +30.7%
Telebras TBR 147.69 49.56 72.13 +13.63 +23.3
Telecom Argen. TEO 38.44 20.00 27.81 +4.81 +20.9
Grupo Televisa TV 43.25 14.88 18.63 +3.00 +19.2
Madeco MAD 24.75 4.00 5.00 +0.75 +17.6
Mexico Fund MXF 23.44 7.56 9.75 +1.31 +15.5
Brazil Fund BZF 30.00 9.31 12.69 +1.69 +15.4
Coca-Cola Femsa KOF 20.94 10.75 13.69 +1.81 +15.1
Telmex TMX 58.44 32.75 42.00 +5.44 +14.9
YPF YPF 38.13 18.69 25.00 +3.00 +13.6
Pepsi Gemex GEM 17.75 7.25 9.38 +0.50 +5.6
Chile Fund CH 25.50 7.13 7.63 +0.13 +1.7
Source: Reuters
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