ATLANTA -- U.S. multinational companies are beginning to fear the negative
impacts of Brazil's currency crisis, and may even find the crisis more costly than
debacles in Russia and other emerging markets.
And banks, especially -- already reeling from Russian woes -- are at great
Brazil and other Latin American economies start to falter, say analysts.
Just last week Chase Manhattan Corp., the biggest lender in Latin America,
has taken steps to reduce its exposure in the region. The biggest U.S. bank said it
lopped $2.6 billion in Latin American loans off its books in the first half of the year,
reducing total exposure there by 15 percent.
U.S. business worries focus on recession and devaluation in Brazil. The
boosted its benchmark interest rate 20 percentage points, to 49.75 percent, to
stem an outflow of capital that could force Latin America's biggest economy to
devalue its currency.
While higher interest rates may bolster Brazil's real, the huge increase
consumer spending and cause a recession in the world's ninth-largest economy
And that would cut into dollar revenue from sales in Brazil and likely
for Coca-Cola Co., Ford Motor Co., Whirlpool Corp. and other U.S. companies
that do significant business there. U.S. economic growth in 1999 may drop to 3
percent from an estimated 3.2 percent in part because of Brazil, said First Union
Corp. Economist Dave Orr.
``Brazil is far more important than Russia for U.S. companies,'' said Paul
senior Latin American analyst for American Express Financial Advisors, which
manages $177 billion in assets. ``If 49 percent interest rates have to be sustained,
we are talking about a contraction for a couple of quarters at least.''
Brazil is the 15th-largest U.S. trading partner, representing about 1.7
trade. Russia, which defaulted on debt and cut the value of its currency, is 31st
with about 1 percent.
``It could have a fairly severe negative impact'' on some multinational
including big banks with loans to Brazil, said First Union's Orr. ``The impact on the
U.S. economy overall will be gradual and moderate.''
Jacques Nasser, head of Ford's worldwide automotive operations who will
become chief executive in January, said, ``It's going to be tough'' for the
automaker to meet its net profit margin target of 5 percent next year because of
slowdowns in emerging markets, including Brazil. Ford has 14.5 percent of Brazil's
car and truck market.
Ford, based in the Detroit suburb of Dearborn, Michigan, earned just $14
in the second quarter in South America, down 44 percent from $25 million in the
year-ago period there. It has said it expects to have a tough time breaking even in
South America in 1998.
Brazil is one of the largest markets for Atlanta-based Coca-Cola, the world's
biggest soft drink company. The country provided 3.9 percent of Coca-Cola's
profit in 1997, according to Sanford C. Bernstein analyst William Pecoriello. Only
the U.S., Germany, Japan, Mexico and Spain provided more.
Pecoriello estimates Brazil's economic woes will hurt Coca-Cola's profits
than 1 percentage point in 1998. Coca-Cola declined to comment.
Benton Harbor, Michigan-based Whirlpool, the largest appliance maker, said
July that the industry's sales in Brazil are expected to tumble about 20 percent this
year. The company didn't release details on sales or earnings in Brazil, which was
expected to account for 10 percent of Whirlpool's revenue this year. A company
spokesman declined to comment today.
Meanwhile, big banks' anxiety about exposure in Latin America has lurked
background during the recent tumble in banking shares, and now those worries
have come to the fore, says the Wall Street Journal.
At the end of March, U.S. banks' total outstanding cross-border exposure
America stood at $76.4 billion, second only to their exposure to the largest
western nations and Japan, and more than 10 times their $6.8 billion exposure to
Russia, according to the latest figures available from the Federal Reserve.
Much of banks' exposure in Latin America is in the form of commercial loans
other types of credit. It doesn't include indirect exposure through lending to hedge
funds and other institutions that invest in Latin America.
``Russia was really very minor in its impact on U.S. banks, and a similar
each of these Latin American countries would be much greater (in impact). There's
no getting around that,'' said Tanya Azarchs, analyst with Standard & Poor's
The Wall Street Journal said most of the concern focuses on Brazil, where
stock market has fallen sharply in the past six weeks and local interest rates have
jumped as part of an effort to defend the currency. U.S. banks' exposure there
totals $27.2 billion, according to the Federal Reserve.
The sheer size of the banks' exposure also means that even a small slowdown
business could have a significant impact on earnings.
Citicorp had the largest Latin American exposure, of $15.5 billion, at
the end of
June, including $4.4 billion in exposure to Brazil and $3.4 billion in Mexico. Of the
total, $5.9 billion was in trading and short-term claims.
J.P. Morgan & Co.'s exposure in Brazil at the end of June totaled $4
company didn't disclose its exposure to other countries.
BankBoston's Latin American exposure stood at $5.4 billion at June 30,
NationsBank Corp.'s had exposure of $2.8 billion. American Express Co.'s
exposure, through its banking unit, was about $1.1 billion.
Bankers Trust Corp., which suffered the most of any U.S. bank in Russia,
about $2.4 billion of exposure in Brazil, Mexico, Argentina and Venezuela at the
end of August, after sharply reducing its exposure in these markets in the past two
months, a spokesman said.