Washington on red alert over Brazil
By Geoff Dyer in São Paulo/London ft
Not since the debt crisis of the 1980s have the great and the good of Washington spent so much time thinking about Brazil. With the turbulence in global financial markets lapping ever closer to the US, Latin America's largest economy has become for many policymakers the last ditch.
Robert Rubin, the US Treasury secretary, admitted last week that Brazil had been the subject of intense discussion in his department. The international lending institutions, led by the IMF, are trying to put together a financing package to prevent contagion spreading to Brazil. Fears that Brazil might be forced into a potentially disastrous devaluation have prompted a fall in the country's reserves of more than $20bn in the last two months.
Brazil will also be one of the more prominent backdrops at the US Federal Reserve today when members of the Federal Open Markets Committee decide whether a reduction in interest rates is needed to keep the crisis from seriously damaging the US economy.
On the face of it this might seem surprising. Several decades of protectionism have left the Brazilian economy relatively self-contained. Despite an aggressive trade liberalisation at the beginning of the decade, imports in 1996 were equivalent to just 7 per cent of gross domestic product. Brazil accounts for only 3 per cent of US exports. But given that Brazil is the ninth biggest economy in the world, a collapse would inevitably have wide reverberations. And the basic trade numbers disguise the very real links between the US and Brazil - both in financial markets and in the corporate sector.
"The damage from a Brazilian crisis would be much higher than just the share of trade," said Edmar Bacha, senior adviser at BBA Creditanstalt and one of the authors of Brazil's economic reform programme.
One of the sectors of the US economy which would feel the sharpest impact of a Brazilian crisis would be the banking industry.
At the end of March, according to the Federal Reserve, US bank exposure to Brazil was $27.2bn, more than to Canada, Italy or Switzerland. The figure for Russia, where European banks took the lead, was $6.8bn. After South Korea, Brazil was the emerging market with the highest US bank exposure.
It is for this reason the banking sector appears so willing to put together its own package of emergency financing alongside the credits Brazil is negotiating with the IMF and other international organisations to prevent contagion. "I'm sure that if they were to ask for help, the response would be very positive," said William Rhodes, vice-chairman of Citibank.
Any institutional investor with an interest in emerging markets would also be harshly affected by a Brazilian crisis. Brazil is the largest country in the Merrill Lynch emerging market debt index, accounting for 26 per cent of the index, compared with 5 per cent for Russia.
A recent survey by Merrill Lynch of 26 of the largest emerging market debt funds found that 20 per cent of their assets were Brazilian. (Unlike Russia, this is largely foreign-issued debt: Brazilian domestic debt is almost exclusively held by Brazilians.)
On the equity side, the Brazilian influence has declined somewhat since Telebrás, the telecoms group, was privatised and split into 12 units in July - the company had been one of the most traded shares on the New York stock exchange and the most liquid American Depositary Receipt (ADR). However, the new Telebrás subsidiaries along with several other Brazilian companies are still among the most widely held emerging market stocks.
US corporate profits would also be knocked if Brazil experienced a prolonged crisis. More than 2,000 US companies operate in Brazil. From the list of the 500 largest multinationals published in Fortune Magazine, 405 have Brazilian subsidiaries.
Octavio de Barros, a Brazilian economist who charts direct investment trends using US Department of Commerce statistics, says Brazil has the highest stock of direct US investment of any developing economy. From 1992 to 1996 Brazil received the third largest amount of US investment, after the UK and Canada.
Privatisation has been responsible for around a third of the investment flow, with companies such as Enron, the energy group, and BellSouth in telecoms, using the sell-offs as an opportunity to expand in Brazil. More than half the new money, however, has come from companies with a long history in Brazil, but which have launched heavy investment programmes as a result of the economic stability of the last four years. Both Ford and General Motors, for instance, have plans to invest $2bn before the end of the decade.
Although Mexico is America's second largest trading partner, direct US investment has been heavier in Brazil than in Mexico since the start of the decade. According to John Mein, executive president of the US Chamber of Commerce in São Paulo: "The Mexican market can be served in a lot of cases out of the US. That is not always the case with Brazil."
Perhaps the most pressing concern for US policymakers, however, is the impact a Brazilian crisis would have on the rest of Latin America, a continent which buys 18 per cent of US exports. Accounting for 45 per cent of the region's output, a loss of confidence in Brazil would prompt a sharp downturn in countries from Argentina to Mexico.
"The linkages with Latin America are much deeper than they were with Russia," said Joyce Chang, emerging markets debt strategist at Merrill Lynch in New York.
"If Brazil goes, there will be no way of shielding the US economy from the emerging markets crisis |
