USA Today. Brazil currency plunges as capital flees
usatoday.com
01/21/99- Updated 05:47 PM ET
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SAO PAULO, Brazil (Bloomberg) - The Brazilian currency plunged
7% amid concerns an exodus of capital could thwart government
efforts to repay its debts and revive the region's biggest economy.
The real weakened to 1.70 to the dollar - rebounding from a record
low of 1.755 - and interest-rate futures soared to 54% on concern that
the supply of dollars at Brazilian banks was drying up as capital flight
has topped $500 million a day this month.
The currency's 29% decline since last week's devaluation and a surge in
interest rates could also stunt growth and capital flows to Latin
America, squeezing profits of companies such as BellSouth, Eastman
Kodak and Motorola that do business in Brazil.
''Unless confidence returns and interest rates decline, Brazil will go into
a serious recession,'' said billionaire financier George Soros, speaking
via satellite to an investor conference in France sponsored by the
magazine L'Expansion.
A week after Brazil devalued its currency, traders said the currency has
yet to bottom out. That means banks and exporters, the main source of
dollars in Brazil, are both reluctant to sell, driving the real down further.
'No Parameters'
Until the market steadies, the government won't take any new initiatives
to narrow its 73 billion real budget deficit or overhaul its finances, said
Pedro Parente, the executive secretary at the finance ministry.
Parente said in an interview that while the government's borrowing
costs have risen since the devaluation, interest rates are likely to fall as
the currency steadies. The government sold bonds at yields of 40%
Wednesday.
''We've got to stop extrapolating a certain behavior (of markets) in one
day,'' he said. ''The market is looking for equilibrium and it's learning
how to operate with floating interest rates.''
Rattling traders were newspaper reports of a shortage of dollars at
Brazilian banks. They could have as little as $700 million on hand, or
less than two day's supply, given the pace of capital flight this month,
traders said.
''If dollar flows aren't reversed, the dollar supply is going to dry up,''
said Odair Abate, an economist at Lloyds Bank. Some said the central
bank sold dollars, intervening in the market for the first time since
dropping its currency defense, leading to the real's late recovery.
Parente denied the central bank did anything to intervene.
Confusion over the central bank's aims left some yearning for the days
of Gustavo Franco, former head of the central bank, thought to have a
steadier hand on the market.
''This type of game that they're playing to leave the market alone then
come in late in the day is foolishness,'' said Banco Fator money market
trader Sergio Machado.
He said the bank's failure to act earlier helped feed negative sentiment
on the market, made it more rumor driven and encouraged exporters to
hold on to dollars and companies to pay off their foreign debt faster.
''You only have dollar buyers and sellers disappear,'' he said. ''If you
don't get rid of negative expectation, it becomes reality.''
Brazil's foreign reserves have dwindled to below $30 billion - from
more than $70 billion at the 1998 peak - as credit lines shut, foreign
debts were repaid and foreign companies repatriated profits. It has also
drawn $9 billion from a $41.5 billion credit line arranged by the
International Monetary Fund in November.
The country agreed with the IMF to keep reserves to a minimum of
$20 billion. Sinking beneath that level could lead to a suspension of
IMF aid.
Bank shares tumbled because the cost of obtaining dollars will rise and
the value of their government bond portfolio fell. Banco do Brasil, the
biggest publicly traded bank, fell 7% to 7.25. Banco Estado de Sao
Paulo fell 7% to 43.8.
The yield on Brazilian dollar-linked debt rose 191 basis points to
18.99% at Thursday's auction, as Brazil sold 300 million reais of the
securities.
Brazilian stocks snapped a four-day rally. The benchmark index
tumbled 4.6% to 7396, on concern the effects of the devaluation would
more than offset Congressional efforts to narrow a yawning budget
deficit. The decline in dollar terms was about 12%.
Legislators Wednesday night approved a tax which could raise 3.1
billion reais ($2 billion) this year. It was considered crucial to efforts to
slash the 73 billion reais deficit.
Preliminary outflows reached $180 million, boosted by the expiration of
a $100 million eurobond that Lloyds Bank's Brazilian unit was expected
to pay Thursday. The bond comes due Jan. 25, according to the
Brazilian investment bankers' association. Almost $7 billion has fled the
country this month.
Currency futures markets hit their 6% limits for an increase of the dollar
against the real, projecting the values at about 1.70 for the beginning of
March.
The plunge in the currency and rising interest rates stoked concern the
government could try to restructure its 320 billion reais of domestic
debt.
Parente dismissed the speculation over such a restructuring.
''It is not in our menu to restructure debt,'' he said. ''This possibility
doesn't exist and it's not necessary.''
The expiration of the March 1 futures contract and another one coming
due at the end of February will likely put further pressure on the real as
companies that have been relying on the futures market as a hedge will
have to look elsewhere.
''I'm anticipating that one to two months from now the demand for
dollars will go up as customers try to replace maturing hedges, putting
further pressure on the real,'' said Ken Giordano, emerging market
forward trader at UBS in New York.
Money market traders have estimated that about $10 billion in currency
contracts on the Commodities and Futures Exchange in Sao Paulo will
expire over the next six months.
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