| Brazilian new low { September 24 2002 } Original Source Link: (May no longer be active) http://www.washingtonpost.com/wp-dyn/articles/A57354-2002Sep23.htmlhttp://www.washingtonpost.com/wp-dyn/articles/A57354-2002Sep23.html
Brazilian Currency Drops to New Low
By Paul Blustein Washington Post Staff Writer Tuesday, September 24, 2002; Page E01
Brazil's currency plummeted to a record low yesterday as a left-wing candidate widened his lead in the race for the nation's presidency, stirring fresh doubt about whether an international rescue launched last month will save South America's largest economy from following Argentina into a disastrous default.
The Brazilian real fell 4.6 percent, to 3.57 reals per dollar, and the nation's bonds and stocks also plunged, after the release of a major poll showing that support for Luiz Inacio "Lula" da Silva of the Workers' Party had risen 4 percentage points, to 44 percent. That figure is 25 percentage points above the candidate of the current government and puts Lula within striking distance of the majority he needs to win the presidency outright in the Oct. 6 election, without facing a runoff.
Yesterday's debacle came less than seven weeks after the International Monetary Fund unveiled plans to lend Brazil $30 billion, the biggest IMF bailout package ever. The rescue's failure to calm Brazilian markets has deepened pessimism about the chances of avoiding a devastating default that could swamp neighboring economies as well.
Although Lula has vowed to honor Brazil's $300 billion-plus public debt and abide by loan terms set by the IMF, foreign investors and banks have pulled money out of the country as his lead widened. Investors fear Lula's earlier statements indicating a desire to renegotiate the debt and worry that he will lead the country away from its free-market, anti-inflation policies. The faster money flees, the more trouble Brazil faces in paying its debts -- which means that the country is caught in a vicious cycle that is very tough to break.
A benchmark government bond, for example, sank 5 percent yesterday, to 51.2 cents per dollar of face value, its lowest level ever except for one day shortly before the IMF bailout was unveiled. At that level, investors are effectively demanding yields of nearly 25 percent to buy the bonds, and with the government facing such punishingly high interest rates to borrow money, even policymakers who want to continue servicing the debt may conclude that the burden is simply too heavy for the economy to bear.
"I don't believe that Lula and his party will deliberately go down that road," said John Williamson, a scholar at the Institute for International Economics, citing the example set by last January's default in Argentina, where a cutoff of international credit has led to a near-paralysis of the economy. "On the other hand, financial markets are pushing Brazil into a situation where there aren't any good alternatives."
In an ominous sign of the potential for Brazil's woes to spread, Chile's peso also fell to a record low yesterday, falling 1.6 percent, on what traders said was concern about the Brazilian developments.
IMF officials have sought to play down the market turmoil as a development they anticipated as a natural consequence of Lula's impending victory. The $30 billion rescue is structured so that most of the loan would be disbursed next year, and then only if the new government follows the IMF's guidelines for keeping a lid on government spending and inflation -- giving the next president, whoever he is, a strong incentive to toe the line. Top fund officials emphasize that they are prepared to cooperate with any of the possible presidents.
"We believe that the market has reacted not to the underlying macroeconomic situation, but to . . . the uncertainty running up to the election, and that as soon as that is resolved, one would see a resumption toward, quote, more normal real interest rates, unquote," Anne Krueger, the IMF's deputy managing director, said last week. "The whole point of the program is to enable Brazil to get through this difficult period of uncertainty."
But a number of market participants and analysts are skeptical. Some even say that with the debt burden so high, it barely matters whether Lula or the government-backed candidate, Jose Serra, wins the presidency.
"In some sense, this has less to do with Serra or Lula and more to do with the fear of fear itself," said Mark Siegel, managing director for emerging market bonds at D.L. Babson & Co.
The latest market decline reverses rallies in the real and Brazilian bonds that followed a late-August effort by the Fed to boost the bailout by persuading international banks to stop cutting credit lines to Brazil.
In the weeks since, however, some market players have started to question whether the banks are really abiding by the accord, which did not include any monitoring or enforcement mechanism.
"The suspicion is that it was words, words, words, and no real commitment," Siegel said.
© 2002 The Washington Post Company
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