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To: Gord Bolton who wrote (26134)	1/13/1999 9:26:00 PM
From: goldsnow	Respond to of 116781

Why Brazil matters At first glance it is difficult to see why economic problems in Brazil are having a damaging effect on Aunt Ethel's collection of stocks and shares. However, the financial woes in Latin America could create a wealth warning for the rest of the world. Brazil is the largest economy in Latin America, accounting for almost half of the continent's total output, and it is the eighth largest economy in the world. If Brazil falls into recession, it is likely to drag the rest of Latin America down with it and that could have serious consequences for world economic growth. Crisis of confidence Just as importantly, Brazil's financial conundrum could create a crisis of confidence on global stock markets. Analysts estimate that about a fifth of US exports are sold to Latin America. If demand dries up, it could send exports into a tailspin and bring to an end a period of amazing growth in the US economy. European companies will also be hit. European banks, for example, are among the largest lenders to Latin America. If the region falls into a prolonged depression, banks could face a mountain of bad debts. Not only will that hit profits, but financial institutions will be less inclined to lend to companies or individuals, which in itself could dampen growth. Pricking the share bubble The UK has traditionally had fewer trading links with Brazil than some of its European partners, but London shares are still vulnerable. This is where Aunt Ethel's portfolio comes in. Paul Mortimer-Lee, chief economist at Paribas, believes that Brazil could be the pin that pricks the share price bubble. Stocks soared in the first week of the New Year on a wave of optimism about the world economy. Investors ignored economic warning signs from Asia and Russia and assumed cuts in interest rates around the world would help stave off a worldwide recession. Coming down to earth Prices around the world have come down to earth as Brazil's problems emerged. That in itself could damage the US economy, which has been fuelled in recent years by soaring share prices. The old stock market adage goes that whenever the US sneezes, the UK catches a cold. This time the US could catch a bad dose of the flu. With stock valuations rising so high compared to historical levels, many economists believed share markets were heading for a fall sooner of later and it was just a matter of time before a problem like Brazil came along. Having been burnt in Asia and Russia, investors are afraid to risk losing their money again and have rushed to sell stocks, not just in emerging markets but throughout the developed world. Economists are divided on where we go from here. Mr Mortimer-Lee believes that the devaluation of Brazil's currency, the real, will cause a wave of devaluations across Latin America and until confidence returns, money will continue to flow out of the region. Mr Mortimer-Lee predicts that the real could lose another 30% of its value against the dollar in the next few months. Depression looming Brian Mullaney, global emerging markets strategist at HSBC goes further. He believes that Brazil's latest problems and the devaluation of the real will plunge the country's economy into recession. "The impact on equity markets worldwide for the time being is going to be... negative. A big devaluation will tip the economy into recession." The devaluation will increase the value of imports, stoking inflation and creating problems for people on lower incomes. Rising prices could also limit the Brazilian government's scope to cut high interest rates, which have been crippling the economy. Some cause for optimism On the bright side, Mr Mullaney predicts that a short, sharp shock for Brazil now may set it on the path of recovery next year. Marian Bell, economist at Royal Bank of Scotland, believes financial markets are vulnerable and she is optimistic that Brazil will not trigger a worldwide collapse. She told BBC News Online: "The US last year showed it was ready to do whatever was necessary. If we get a further fall-out on the world's financial markets coming from Brazil then interest rates will be cut again. I suspect this particular problem can be held at Brazil." However, Ms Bell believes that the blow to Brazil highlights that the world and the UK are heading for a sharp slowdown. In a world where international financial barriers are becoming increasingly blurred, Brazil matters and, if its economy collapses, the repercussions will be felt from Sao Paulo to Sittingbourne. news.bbc.co.uk