SAO PAULO, Brazil (Reuters) -- World financial markets were
looking better Thursday but remained on red alert as Brazil faced a
decisive day in its struggle to avoid a Russia-style financial meltdown.
Brazil's shot at a controlled currency devaluation of roughly eight percent
be put to a stiff test when trading opens in Europe and the Americas,
"Thursday is going to be another very nerve-racking day," said Constantin
Jancso of MCM Consultores in Sao Paulo.
Asian markets showed encouraging resilience to the Brazilian shock
waves, with stock market falls ranging from nearly five percent in Seoul
to little changed in Hong Kong. Tokyo managed to gain 2.5 percent as
a weakening yen boosted export prospects.
Asian analysts, all too familiar with currency collapses in their countries,
Brazil's move had been in the cards and their region was fairly sheltered from
its impact at present.
European stock markets began to recover gingerly Thursday from their
heavy losses, while the dollar was firm against the euro and yen after the
limited damage in the Asian markets.
UK stocks were expected to move tentatively higher after taking what one
trader called a "pretty hard savaging."
In Brazil, all eyes would be on the capital outflows-- the make-or-break
indicator of the government's risky bet, analysts said.
An estimated $1.5 billion poured out of Brazil Wednesday. Unless the tide
turned, Brazil could simply run out of cash to defend the real currency, the
cornerstone of four rare years of economic growth and low inflation.
Brazil's Central Bank devalued the real Wednesday, scrapping a mini-band
within which the real traded against the dollar and pegging it instead within a
new, wider maxi-band.
The real plunged quickly to the new band's outer limit, down more than
percent from Tuesday's close at 1.32 to the dollar. The dollar fell against the
euro amid fears Brazil might tip Latin America into recession, hurting U.S.
exports. Shares in Europe were down, too.
Markets had long considered the real overvalued, perhaps by as much as
percent. But keeping the currency strong was a mantra of President
Fernando Henrique Cardoso's government.
Stunned investors were also unnerved Wednesday by the resignation of
Central Bank President Gustavo Franco, one of the mentors of Brazil's
newfound economic stability who quit rather than put into practice a
devaluation he opposed.
Brazil's reserves-- the country's best means of defending the real-- stood
about $45 billion, already down about $3 billion so far this month, market
"The markets are likely to want to put Brazil's new foreign exchange policy
to the test now," said Jose Carlos Faria, senior economist with ING Bank in
An interest rate increase may also be in the works to defend the new
currency, as Finance Minister Pedro Malan admitted late Wednesday in an
interview with Reuters Television.
Brazilian newspapers splashed across their front pages the devaluation,
dollar outflows and the resignation of central bank head Gustavo Franco-- a
combination that spells the biggest shock since Cardoso stabilized the
economy in 1994.
"Less than two weeks into President Fernando Henrique Cardoso's second
term, the country watches a precipitation of new and old problems at a
surprising speed, in perhaps the most dramatic moment of its recent history,"
the daily Folha de S. Paulo said in its front-page editorial.
O Estado de S. Paulo highlighted the intervention of world leaders such
U.S. President Bill Clinton, who said the U.S. maintained a strong interest in
Brazil's ability to keep its economic reform program on track.
Estado speculated that the International Monetary Fund was irked it was
notified in advance of the devaluation after assembling a $41.5 billion credit
line to prop up Brazil amid fallout from Russia's crisis.
IMF Managing Director Michel Camdessus issued a statement late
Wednesday urging Brazil to keep on pushing for spending cuts to meet fiscal
targets agreed in return for the rescue loans.
Copyright 1999 Reuters.