January 14, 1999
Devaluation puts Brazil, markets on red alert

                  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 will
                  be put to a stiff test when trading opens in Europe and the Americas,
                  analysts said.

                  "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, said
                  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 eight
                  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 20
                  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.

                  Reserves decline

                  Brazil's reserves-- the country's best means of defending the real-- stood at
                  about $45 billion, already down about $3 billion so far this month, market
                  calculations showed.

                  "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
                  Sao Paulo.

                  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 as
                  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 not
                  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.