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To: John Hunt who wrote (26268)	1/15/1999 11:16:00 AM
From: Gord Bolton	Respond to of 116958

New Economic Tack for Brazil By Peter Muello Associated Press Writer Friday, January 15, 1999; 10:46 a.m. EST RIO DE JANEIRO, Brazil (AP) -- The Brazilian currency devaluation that stunned world markets is an idea that has been growing for months. Its completion may enable financial and political leaders to change the course of Latin America's largest economy. The Central Bank took another step on that course today, removing all restrictions on dollar trading until Monday, when it promised to release new rules. The Brazilian currency, the real, immediately tumbled from the upper limit of 1.32 to the dollar to 1.55, before strengthening slightly. Some economists speculated that the bank could be testing the waters to see what level the real would reach before setting a new band, or could even let the real float freely. The Sao Paulo Stock Exchange, Latin America's largest, immediately shot up after six straight days of losses. Two hours after opening, the Bovespa index was up 18.4 percent. Hints that Brazil was considering major changes in economic policies came as early as President Fernando Henrique Cardoso's Jan. 1 inauguration speech. ''I do not call myself lord of a single path. I am ready to debate and rectify the course,'' Cardoso said as he took office for a second four-year term. Within his government, a tug-of-war was already under way for control of the Real Plan, the 1994 economic program that tamed 2,700 percent inflation and propelled Cardoso to the presidency. One faction favored high interest rates to attract dollars, keeping the Brazilian currency, the real, strong, and inflation low. Its champions were Finance Minister Pedro Malan and Central Bank chief Gustavo Franco, who resigned Wednesday. On the other side were the ''developmentalists,'' who wanted to lower interest rates and loosen the straitjacket on the real, even if it meant reheating prices. As the economy spun toward recession, it won support from an unlikely alliance of labor unions and big business. Workers blamed high interest rates for a rise in official unemployment to a record 8 percent -- and a predicted 12 percent in 1999. Businessmen said high interest rates were strangling the economy -- car sales were down 28 percent last year from 1997 -- and clamored for Franco's head. Even the government was a victim of its own policy: Interest rates were the main reason the spending deficit shot up to about $65 billion, or nearly 8 percent of Brazil's gross national product. On Wednesday, Franco capitulated. ''I would never think of being an obstacle to the natural redirection of interest rates and foreign exchange policy, as the president desires,'' Franco said in his farewell speech. His replacement, former Central Bank monetary policy chief Francisco Lopes, said the goal of the effective 7.6 percent devaluation was to lower interest rates, now at nearly 30 percent. ''The change in exchange policy was in the works for some time,'' said Rodrigo Barros, a trader at Banco Cidade in Sao Paulo. The devaluation will make Brazilian exports cheaper and hopefully reduce the trade deficit, which was $6.3 billion last year. The government also is likely to drop Franco's ''slow-and-steady'' policy, which has sought to attract investors by touting Brazil's predictability. Since the Asian crisis, little is predictable. The question now is what will happen to inflation, the scourge of the Brazilian economy for decades. Prices rose less than 2 percent last year, according to most indexes, and the University of Sao Paulo recorded deflation in the nation's biggest city. With more money in the economy, inflation is sure to restart. But public opinion polls taken before last October's elections showed many Brazilians were more worried about jobs than inflation. © Copyright 1999 The Associated Press