And on this news from Brazil we go to record highs:
Panic Emerges in Brazil as Currency Continues to Plunge
By DIANA JEAN SCHEMO
RIO DE JANEIRO, Brazil -- Signs of alarm deepened across Brazil on Friday, as former U.S. Federal Reserve Chairman Paul Volcker warned that Brazilian leaders appeared to be underestimating their nation's financial crisis, and legislative employees lined up to empty their bank accounts on rumors the government would freeze personal savings,
The national currency, the real, tumbled well past the psychological barrier of 2 to the dollar. The currency, which lost only 7.5 percent of its value last year, has plummeted 43 percent in less than three weeks, after the government abandoned its policy of defending the real's value by purchasing it with dollars in the foreign-exchange market. That policy was costing Brazil billions of dollars it could not afford to spend.
The traumatic loss of value in the real has become the latest symbol of a global financial crisis that began in Thailand 19 months ago and spread to East Asia, Russia and now, Latin America. The currency plunge has threatened to return Brazil to an era of hyper-inflation and economic stagnation.
In an increasingly desperate attempt to stabilize the real by making it more attractive to investors, the government raised interest rates for the second time this week, to 37 percent from 32.5 percent Monday.
The currency's decline has helped the stock market. With many Brazilian stocks now viewed as bargains, the Sao Paulo Bovespa index rose 2.3 percent Friday.
Speculation flew wildly that the government would announce a bank holiday Monday, when it would unveil a new austerity program, introduce controls on the movement of capital and perhaps seize bank accounts. The rumors led congressional employees to crowd bank branches at the Congress in Brasilia, the nation's capital.
"People are desperate, feeling that they won't be able to take out their money," said one bank employee, who spoke by phone from Brasilia on condition of anonymity. "It's generating a tumult like I've never seen." The employee said the bank started filling up at 2 p.m. and that by 6 p.m. the branch had sent for its third refill of cash. No substantial runs on accounts were reported in other parts of the country.
President Fernando Henrique Cardoso, in an effort to counter the rumors and skepticism about the country's ability to pay its debts, promised Brazilians he would not unilaterally confiscate bank accounts, as former President Fernando Collor de Mello did shortly after taking office nine years ago.
Then, Collor barred the access of Brazilian businesses and private citizens to all but a few hundred dollars of their bank accounts and investment funds from one day to the next, as a shock method of improving the country's financial position and stemming inflation. People who had agreed to buy houses or cars, or to take trips, had to cancel their plans. Unable to pay their bills, some committed suicide. Brazilians only regained access to their money in installments beginning in 1992.
Friday, Cardoso attempted to dispel fears of a rerun. "There will be no bank holiday, and no plan is being elaborated," Cardoso said at a ceremony in Sao Paulo. "I am not the kind of man who does confiscations, who closes accounts all of a sudden. It would be a betrayal of the Brazilian people, of my past, of the millions of votes I received."
However, the sense of disconnect between the government and reality is growing here. Investors inside and outside Brazil are wondering when the government will take decisive measures to restore confidence, while senior officials attempt to ward off panic by promising there will be no changes. Friday night, Cardoso and Finance Minister Pedro Malan both called for "serenity" on the part of Brazilians.
"The dollar will go to where it wants," Cardoso told reporters in Sao Paulo on Friday. "It will come back. This is speculation. We're not going to be nervous because of speculation." While not ruling out further spending cuts, Cardoso said Brazil would wait for the Brazilian currency to find its "normal bed, so that the real will appreciate again."
Talk like that worried Volcker, who joined government officials for a panel on Brazil's economic outlook at the Rio de Janeiro Industrial Federation on Friday. "How long can this turbulence last, unassisted?" Volcker asked the room full of businessmen. "Forever, and it's getting worse."
He said that once Brazil showed how it would deliver what investors see as essential -- further cutting spending, averting hyperinflation, lowering interest rates and shrinking an 8 percent budget deficit -- the currency would stop falling.
"You can't wait for things to stabilize by themselves," he said. "That's why it's important for the political system and for people to understand what's at stake."
An increasingly gnawing concern is the government's failure to explain how it will find $50 billion to service its foreign debt this year, and refinance the lion's share of 320 billion reals in domestic debt. At the same time, a looming recession that could shrink Brazil's economy by 7 percent this year makes the government shrink from further belt-tightening now.
"I think it's a strategy for doing nothing," said Walter Molano, head of research at BCP Securities, a Greenwich, Conn.-based firm that trades in Latin American government securities. "They feel time is on their side, but the reserves are leaving each day."
Molano said that at the current rate of about $520 million a day leaving the country, Brazil's foreign reserves would dwindle to nothing within two months. "Once these reserves go out, they're going to lose all their ability to control the situation," he said.
|
