BBC--Latest on Brazilian Financial Crisisgreenspun.com : LUSENET : TimeBomb 2000 (Y2000) : One Thread
It appears that the Brazilian stone is no longer causing ripples--for the moment. The last paragraph of the following is the most significant for this forum: "A steep downturn in Brazil would hit all Latin American economies hard and in turn provide a further impetus to a world economic slowdown. Some say a world recession would then be inevitable."
Brazil fights back
New bank chief Francisco Lopes is looking to restore confidence
Brazil's economic future remains in the balance after foreign investors took flight last week causing a rapid devaluation of the currency and leaving its financial markets on the verge of meltdown.
An uneasy calm prevailed over the weekend as leading finance officials seek US and International Monetary Fund IMF) support for their dramatic actions on Friday to float the currency - a move that appears to have been initially successful in restoring confidence.
Brazilian Finance Minister Pedro Malan said the central bank will announce new currency exchange rules on Monday in Brasilia. Meanwhile, Brazilian president Fernando Henrique Cardoso is believed to have affirmed an ongoing commitment to the country's new floating exchange rate.
He said the decision to abandon the currency's tie to the US dollar was "very correct" and he "does not foresee any special changes in the area of exchange rates", according to one Government minister on Saturday.
Mr Malan, and the new head of Brazil's central bank, Francisco Lopes, are in Washington after meeting the managing director of the IMF, Michel Camdessus on Saturday, and are due to meet US treasury officials on Sunday.
So far, the IMF has offered guarded support to the float of the currency, called the real. The move appeared to be "an intelligent step to stem the loss of reserves" an IMF spokesman said, but little else has publicly emerged from the meeting.
IMF, US and broad international investor approval is vital Brazil. To avert a worsening of its financial crisis, Brazil needs:
Support for its new exchange rate regime to lend credibility to its economy and financial markets.
A renewed commitment by the IMF for a $41bn loan package to help the world's eighth largest economy through the crisis
The framing of a tough anti-inflationary austerity budget cutting back on government spending secured the IMF deal last year.
But the devaluation of the real means it will almost certainly have to be revised if further loan instalments are to be made.
Currency gamble pays off
The real slumped in response to intense selling pressure from financial markets after foreign investors began withdrawing billions of investment capital, leading to the resignation of the central bank governor. The crisis of confidence started when a Brazilian state government defaulted on debt repayments to the central government.
First, the the government tried to orchestrate a controlled devaluation. When this failed it abandoned controls altogether, leaving the real at the mercy of foreign exchange markets.
Unlike in Russia last August, the government's giving way to market forces and allowing significant devaluation did not lead to a wholesale collapse in confidence. Instead it has boosted confidence - initially at least.
The sharemarket surged 33% on Friday after plunging 15% since Wednesday, inspiring a recovery on major world share markets, while the real stabilised at 143 to the US dollar.
ING Barings' chief Latin American economist, Arturo Porzecanski, said it could be the first time in history that a Brazilian devaluation boosted investor confidence instead of undermining it.
But other commentators are warning that Friday's stock market rally may not last.
The Brazilian Government now must move to stop the financial crisis worsening and spilling over to the wider economy, causing deep recession.
The key challenge is how to lower interest rates and keep inflation in check.
While interest rates may be able to be cut from their very high levels (set to defend the artificially-high pegged currency), reductions will be limited by the need to attract foreign capital and help underpin the floating currency.
Meanwhile, inflation is likely to rise after the devaluation putting more upward pressure on interest rates. Companies with debts in dollars will find them much harder to service while consumer prices will rise as imports become more expensive.
And the government still has ahead of it the painful task of persuading its Parliament to approve the rest of its tough austerity programme which will impede economic growth further.
Leading finance house Salomon Smith Barney has warned that the Brazilian economy could contract by as much as 5% this year.
A steep downturn in Brazil would hit all Latin American economies hard and in turn provide a further impetus to a world economic slowdown. Some say a world recession would then be inevitable.
-- Old Git (firstname.lastname@example.org), January 17, 1999
I hope that no one out there contributes the current finacial problems in Brazil to some phantom Y2K conspiracy. Brazil has had difficulties for years just like all the all the other countries.
-- (stoptheBS@TB2000.forum), January 17, 1999.
I don't think anyone attributes the financial problems in Brazil to Y2k.
However, anyone who understands the broad issues associated with Y2k could understand the difficulty of a bank or corporation or the government of Brazil in dealing with y2k issues under dire economic conditions. I would suggest you think about the ecomonic context under which y2k fixes must take place worldwide in this next year and beyond.
-- Michael Taylor (email@example.com), January 17, 1999.
Our American economy is way over inflated, while the rest of the world starves to death. The Global economy is falling over a cliff, and it has a rope attached to the United States, and we are going down with it. Y2K will not "cause" the depression at the bottom of the cliff, since that it is already there. It will be more like a "kick" which will push us over the edge.
Clinton and Greenspan warned us about this last year:
October 2, 1998: 11:43 a.m. ET NEW YORK (CNNfn)
"We cannot remain an oasis of prosperity in a world in which so much of our growth depends upon trade, and in which so many of our trading partners are experiencing economic turmoil," Clinton said in a press conference.
We wanted a global economy, now we've got it!
-- (m.d.@web.com), January 17, 1999.
Inflation could destroy whats left of the consumer confidence in Brazil. And besides, seems to me that the other latin american countries would want to devalue to stay competative with exports.ww
-- WAYNE WITCHER (WWITCHER@MVTEL.NET), January 17, 1999.
m.d. - Exactly! To ponder further on what a possible recession in Latin America would mean to us, think U.S. imports/exports, not just down south but also Europe, which has large investments in Brazil. If foreign purchasing power is lost, either by devaluation or inability to repay loans, that means we won't sell as much abroad, that means lost jobs, that means less money for Y2K remediation, for instance. (Hog farming in NC and elsewhere, is already suffering from the Asian collapse because a great deal of pork was exported; some dumping of exported manufactured products is going on--notice how cheap Asian-made products are these days?) I understand Citibank and Chase Manhattan are also heavily invested in Latin America. In addition, if factories and ranches go out of business because of devaluation/recession, or if owners have just given up and moved their money to the US (apparently billions of dollars of Brazilian money have moved recently), sources of oil, shoes, beef, clothes--what else?--will be lost or become scarce. And prices on these items will eventually climb. (Much of the beef in your inexpensive fast-food burger comes from Brazil.)
This information is just another nudge to remind you there may not be as much Y2K-prep time left as you think. Get your stuff now while the prices are relatively low and most people are still complacent!
-- Old Git (firstname.lastname@example.org), January 18, 1999.