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

To: Steve Fancy who wrote (11911)	1/18/1999 2:58:00 AM
From: Steve Fancy	Read Replies (1) \| Respond to of 22640

Brazil: 'The Genie Is out of the Bottle' From the current Business Week President Fernando Henrique Cardoso had lost the real long before Brazil devalued the currency on Jan. 13. Months ago, his failure to carry out pledges to slash Brazil's massive deficit spending had eroded Brazil's credibility in world markets. Despite 30%-plus interest rates, few foreigners were willing to risk new investments in Brazil's markets. Now analysts expect the real's fall to steepen. Signaling investor worries, Sao Paulo's stock market plunged, and shares of foreign companies with big stakes in Brazil--including U.S. banks that as of Sept. 30 were in for $18.6 billion--took a beating from New York to Madrid. What next? A rapidly sinking real could ignite price increases, wiping out four years of gains under Cardoso's inflation-busting Real Plan. The buying power of wages would plummet, hitting Brazil's poor. And Brazilian companies with debt in foreign currencies could be devastated if the real keeps tumbling. AFTERSHOCKS. The key in coming days and weeks will be the flow of capital. To slow the bleeding, Cardoso needs to show the markets immediately that he can get fiscal reforms through Congress. His goal is to cut $23 billion in deficit spending, a condition for the $41.5 billion Brazilian aid package led by the International Monetary Fund. More important, budget reform is crucial if Brazil is to regain investor confidence and halt the fall of its currency. ''Unless the government gets fiscal results, no monetary plan will work,'' says Mauro Schneider, economist for ING Barings in Sao Paulo. Again, the world is watching warily for repercussions in other economies in Latin America. ''Argentina is victim No. 1,'' says Francis Freisinger, chief Latin America economist for Merrill Lynch & Co. in New York. ''Undoubtedly, it will move into recession.'' Brazil is Argentina's top trading partner, so a weakening real will hurt Argentine exporters. U.S. companies that have big stakes in Latin America, such as consumer-goods giant Gillette Co. and energy company AES Corp., saw their shares fall in the aftermath of the real devaluation. U.S. investors may soon shrug off the new shock from Brazil, as they did last fall. But with each new crisis, both the country's credibility and its options shrink. During the 1997 economic crisis in Asia, Brazil hiked interest rates and capital flooded back into the country. Now, Brazil has lost investor confidence and its favorite monetary tool--raising interest rates to entice capital. The most likely outcome is that Brazil will fail in its attempt to control devaluation of the real by gradually shifting the band within which it trades. Eventually, Cardoso will probably be forced to accept free-floating exchange rates. ''This is slow agony,'' says Walter Molano, head of economic and financial research at BCP Securities in Greenwich, Conn. ''The genie is out of the bottle.'' And Brazil will feel the hex for months to come. By Ian Katz in Sao Paulo