<OT> Brazil & Soros>
Top Financial News
Tue, 02 Feb 1999, 3:01pm EST
Brazil Names Soros Aide Central Banker as Currency Soars 10% vs Dollar
Brazil Names Soros Aide Central Banker; Real Gains (Update4)
(Adds more on background on Fraga; updates markets; adds
comment on Soros.)
Brasilia, Brazil, Feb. 2 (Bloomberg) -- Brazil replaced its
central banker for the second time in three weeks, hiring a fund
manager from financier George Soros to restore confidence in the
government's ability to steady the currency.
The currency surged as much as 10 percent to 1.74 to the
dollar as Arminio Fraga, 41, a former central bank director and
manager of Soros' Quantum Emerging Markets Growth Fund, was named
to head the central bank.
''He's the type of person investors and markets trust,''
said Rowena Dasgupta, an analyst at the G7 Group, a Washington-
based consulting firm.
Fraga replaced Francisco Lopes, who failed to stem an
outflow of more than $5 billion that helped drive down the
currency 33 percent the Jan. 13 devaluation. Lopes rattled
markets from day one, failing to convince investors he could
steer currency policy after the devaluation.
The government's benchmark ''C'' bond rose for the fourth
day, gaining 1.4 percent and driving its yield to 16.8 percent, a
two-week low. The benchmark stock index fell 3 percent, though it
gained 8 percent in dollar terms.
Advisors
President Fernando Henrique Cardoso's decision to tap Fraga
and a growing core of advisors from outside government suggest a
search for fresh ideas at the cost of inspiring domestic
political opposition.
Criticism of Cardoso, whose popularity is sinking, could
escalate if the government agrees to new spending cuts to
convince the International Monetary Fund to release $9 billion of
aid sooner than planned.
Advisors such as Fraga, and former Finance Minister Marcilio
Marques Moreira and ex-head of the state development bank, Andre
Lara Resende, were all involved in government efforts to
restructure the government's foreign debts earlier in the decade.
Now, financing the government's growing 340 billion real
mountain of domestic debt could be Fraga's biggest hurdle.
''The domestic debt overhang is still the key problem,''
said Tulio Vera, head of emerging markets research at ABN Amro.
''The balance still appears to be tipped to either inflating away
that debt or some reconfiguration of that debt.'' Government
officials have said they'll be able to repay the debt.
IMF Talks
Fraga, a native of Rio de Janeiro, has a doctorate in
economics from Princeton University and was a vice-president at
Salomon Brothers from 1989 to 1991.
After that, as head of international affairs for Brazil's
central bank, Fraga oversaw negotiations between Brazil and its
creditor banks that led to the 1993 Brady debt accord, named for
former U.S. Treasury Secretary Nicholas Brady.
In the past 12 months, the Quantum emerging markets fund
managed by Fraga declined 22 percent, according to Bloomberg
analytics.
''Fraga (is) more market oriented, which is exactly what
Brazil needs at the moment,'' said Jorge Simino, a fund manager
at Unibanco.
Replacing Lopes, Fraga is stepping in as international
investor confidence ebbs and talks with the IMF heat up.
The IMF's No. 2 official, Stanley Fischer, arrived in Brazil
demanding quick action to shore up confidence in the currency,
such as new measures to narrow a 73 billion real budget deficit.
''Fischer's arrival can only mean that an IMF deal is ready
to sign,'' said Moreira, Brazil's representative for Merrill
Lynch & Co.
These negotiations could also establish new exchange-rate
policies, setting interest rate targets to guide monetary policy
and some basic rules about how and when the government might
intervene in the currency markets.
While Soros, Fraga's ex-employer, has called the IMF's
insistence on high interest rates a mistake, interest rates will
likely remain around 40 percent as investors seek to offset their
currency risk, analysts said.
''The government doesn't want a devaluation and inflation
spiral,'' said Siobhan Manning, senior sovereign debt analyst at
PaineWebber Inc.
Today, the government sold 1 billion reais of one-year
government bonds to yield 40.41 percent. The sale follows a week
in which the government rejected comparable yields in debt sales.
Yields at those levels drive the speculation the government
will be forced to reschedule its debts.
Soros Connection
Fraga's appointment raised eyebrows, particularly because it
followed comments by Soros yesterday that helped trigger a rally
in the currency and stock markets.
The financier called the real undervalued, helping drive a 6
percent gain in the currency.
''It worries me when sensitive information like this comes
out a day after a large U.S. hedge fund was buying capitalization
bonds,'' said Simon Treacher, who helps manage about $1.25
billion in emerging market bonds at Morgan Grenfell Asset
Management, declining to name the fund, on Fraga's selection.
''That hedge fund caused a short squeeze yesterday. It's
worrying that, after this announcement was made, the same large
U.S. hedge fund was rumored to be selling capitalization bonds,''
he said. |
