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

To: TokyoMex who wrote (8220)	9/17/1998 1:19:00 AM
From: chirodoc	Read Replies (1) \| Respond to of 22640

Market Features: U.S. Being Coy in its Dance with Brazil By Peter Eavis Senior Writer 9/16/98 7:53 PM ET The U.S. would like you to believe it can stop Brazil from exploding in a currency and debt crisis. But can it? Larry Summers, deputy Treasury secretary, speaking in Congress Wednesday afternoon implied that the U.S. will do what it can to protect Brazil's dollar-pegged exchange rate from current devaluation pressures. Summers said that the U.S. recognizes "the central role of currency stability in the Real Plan." What's odd, however, is the manner in which the U.S. is going about bringing Brazil back from the brink. The U.S. and the IMF have started a delicate, all-things-to-all-men maneuver to save the real. The danger is they go too far in this absurd dance and the market soon loses faith and slaughters the currency. The almighty rebound in Brazilian stocks and bonds -- the Bovespa is up 42% since its low last week even after today's 146-point drop -- has been prompted by reports that the U.S. and the IMF along with other multilateral lenders are ready to provide Brazil with up to $30 billion to defend its currency. Yet we've heard no details about this package from the U.S., the IMF or the Brazilians. At this stage, one could argue that it's in everyone's interest to keep things nebulous. The U.S. policymakers are hoping that they can shore up confidence in Brazil simply by making noises about a rescue package. By releasing no details, they avoid uncomfortable questions from U.S. congressmen who are against giving the IMF more money. It's inconceivable that emergency aid would be disbursed without the lenders demanding that Brazil commit to policies to cut its out-of-control budget deficit, equivalent to nearly 8% of GDP. But the government of President Fernando Henrique Cardoso does not want to enter a formal, beggar-thy-neighbor agreement with the IMF ahead of the Oct. 4 elections. Nor would announcing much-needed budget cuts help Cardoso's prospects, as these -- to be effective -- would have to take away the gravy from many powerful vested interests and thousands of state jobs would have to be shed. But the coyness of the U.S. could just as easily be due to fear that Brazil, with its dangerous domestic debt overhang, could default and devalue just like Russia. Believing in a large international rescue package is "a huge leap of faith considering what happened in Russia only a couple of months ago," says David Harding, strategist at Nicholas Applegate. Also, the damage to the career of Treasury Secretary Robert Rubin -- one of the few Clinton cabinet members to retain credibility through the Lewinsky scandal -- would be huge if he were to OK a large loan to Brazil only to see it swallowed up in a crisis. The IMF, after being defrauded out of billions of dollars by the Russians, may also balk at extending aid to Brazil, which has handled the current crisis in the most irresponsible fashion. Cardoso did not raise rates early enough and he has yet to give even the slightest indications of where the fiscal ax may fall after the elections, which polls say he will win easily. The odds are still heavily tilted against Brazil. The country has over $90 billion of domestic real-denominated debt to roll over by the end of this year, and $43 billion in October alone. Let's put this domestic debt into perspective. Deutsche Bank economists calculate that Brazil's domestic debt service for September -- $29 billion -- is double the amount of lendable funds at the IMF. The IMF has a lot more funds at its disposal than its supporters maintain. At a stretch it could raise over $80 billion. But even if it turns out that the IMF and others can't come up with more than $30 billion for Brazil, some analysts say that the domestic funds and banks can be counted on to absorb this domestic debt -- without external aid. However, these usually faithful investors are getting extremely edgy, judging by the fact they are demanding shorter and shorter maturities and higher and higher interest rates every week. Key interest rates are now at 50%. Brazil also has to service some $85 billion in foreign debt in 1999 and cover a current account deficit of $15 billion. It's hard to believe that the markets will be rolling over that amount of loans and bonds in this environment. One last depressing number: Dollar outflows are estimated at $500 million Wednesday, taking total reserves below $50 billion. Yes, today's outflow is markedly less than on some panic-stricken days last week. But it's larger than Tuesday's $355 million, and, most worrying, money is still leaving despite the recent rate hike and today's supportive words from Rubin et al. "Brazil can't get out of the vicious debt circle it's created for itself. This is certainly no time to buy Telebras (TBR:NYSE ADR), even if it's trading at $71", quips one Latin America analyst who did not want to be named.