From the BBC (London):

http://news.bbc.co.uk/hi/english/business/the_economy/newsid_289000/289071.stm

Wednesday, March 3, 1999 Published at 00:01 GMT

Brazil in real trouble

The sharp drop of the real will soon drive up inflation in Brazil

The Brazilian government has been struggling to prevent a further dramatic collapse in the value of its currency, the real.

On Tuesday the real plunged to a record low for the second day running, forcing the central bank to intervene by selling foreign exchange reserves.

It now takes 2.17 real to buy one US dollar. Without the central bank intervention, the drop could have been steeper. During the day the real had slipped as low as 2.22 to the dollar.

Brazil's troubles are likely to have a dramatic impact on the economies of the whole of Latin America and could trigger new volatility on Wall Street and other stock markets around the world.

On Monday the Brazilian currency had tumbled 5% to close at the then-record low of 2.15 to the dollar.

Central bank intervention

The central bank had intervened for the first time shortly after Brazil's foreign exchange markets opened for business on Tuesday. The bank pumped dollars into the market and bought up real, but despite this the currency continued to slip.

When the real hit the 2.22 level, the bank intervened again, this time with more success.

In an official statement, the bank acknowledged that it had been active on the markets by selling dollars during most of last week. According to the central bank's web site, the country's currency reserves have now shrunk to $35bn.

Joaquim Kokudae at Lloyds Bank in Sao Paulo said: "The Central Bank is going to have to act quickly to stabilise the dollar below 2 reals this month, or we're going to have problems with inflation."

On Wednesday, Brazil's Senate is due to confirm Arminio Fraga as the new head of the country's central bank. Mr Fraga's appointment had met fierce criticism because of his previous job, working for the speculator and hedge fund guru George Soros.

Mr Fraga's confident performance during the Senate hearings last week had actually led many investors to believe that the real would strengthen this week.

Real setback

The government and central bank were forced to stop defending the currency's peg to the dollar in mid-January. Since then the real has lost more than 45% of its value.

The real had first come under pressure when speculators, hedge funds and both Brazilian and foreign investors began to move massive amounts of dollars out of the country. At one point more than $1bn a day was taken out of Brazil.

Defending the real's peg to the dollar became so expensive that the central bank decided to let the real float on the exchange markets.

This was a bitter blow for the government. The introduction of the real in 1993 had squashed hyper-inflation running at 2,500% a year and its parity with the US dollar was at the heart of the government's economic policy.

IMF help

The economic squeeze is increasing the need for the government to strike a quick deal with the International Monetary Fund (IMF). Both sides are currently negotiating a new loan in yet another bid to save Latin America's largest economy.

The IMF has already agreed to help the country with a $41.5bn rescue package, but both sides still have to agree the conditions for the release of the second $9bn tranche of that money.

The real's flotation had forced IMF and the government to renegotiate the terms of the deal.

The IMF's managing director Michel Camdessus said on Monday that he expected "good news" from the talks in the next few days. He praised the Brazilian government's efforts to "put their house in order" by implementing budget cuts designed to reduce the overwhelming public sector deficit.

"We're playing with fire," said Augusto Lopez-Claros, an economist at Lehman Brothers in London. "If confidence doesn't return to Brazil following the approval of the IMF programme there will be serious implications for the economies of the region and the whole continent", he said.

Latin American impact

Many economists worry that the whole of Latin America could experience an economic slump if the crisis in Brazil cannot be contained. This in turn could hurt the profits of US companies, and inflict heavy damage on Wall Street and the world's stock markets.

Until now company earnings in the US have proved to be surprisingly resilient to the turmoil in Latin America and Asia.

Alice Rivlin, vice chair of the US Federal Reserve told international bankers in Washington: "Brazil is walking a precarious path through a minefield. And it is not yet clear what its immediate economic future holds."

Cut and pasted by

-- Old Git (anon@spamproblems.com), March 02, 1999

Answers

Substitute USA for Brazil and we have a near term future news story.

-- Ed (ed@lizzardranch.com), March 02, 1999.

Don't have to do that, Ed, the information's up there. Excerpt from above:

"Many economists worry that the whole of Latin America could experience an economic slump if the crisis in Brazil cannot be contained. This in turn could hurt the profits of US companies, and inflict heavy damage on Wall Street and the world's stock markets."

Which would, in turn, eat into or completely devour a company's budget allocation to remediate Y2K. There are other implications but Y2K remediation is the most on point.

-- Old Git (anon@spamproblems.com), March 02, 1999.

Aren't American banks up to their necks in Brazilian loans? I've been thinking that Brazil is the key to the unraveling of the US economy, y2k or no y2k.

-- cody varian (cody@y2ksurvive.com), March 02, 1999.

Yes, Cody, on November 13 last, also other nations and IMF, all told $41 billion. See:

http://cnnfn.com/hotstories/economy/9811/13/imf/index.htm

-- Old Git (anon@spamproblems.com), March 02, 1999.