- The Washington Times - Thursday, August 29, 2002

In the wake of the International Monetary Fund's (IMF) decision to lend Brazil $30 billion, market gyrations have been as dizzying as a well-shaken caipirinha, a traditional Brazilian cocktail. With Brazil's Oct. 6 presidential election looming, investors have focused on both the political and financial outlook.

The IMF approved its loan to Brazil on Aug. 7. Early the next day, markets were rallying. The Brazilian currency, the real, climbed 5 percent. J.P. Morgan's emerging market bond index, the EMBI+, also got a boost. Even U.S. stocks were boosted, with Citigroup, which has a large exposure in Brazil, enjoying a share spike up more than $2 to $33.55 per share.

But the failure of the lead political candidates, socialists Luiz Inacio Lula da Silva and Ciro Gomes, to voice support for fiscal austerity soured sentiment. On Aug. 9, Brazil's currency slid 3 percent in value. The benchmark bond fell more than 10 percent to about 55.2 cents on the dollar.

Now, relative bullishness has returned. Jose Serra, investors' favorite for the election from the ruling party, has capitalized effectively on free TV advertising, aggressively targeting Mr. Gomes. According to the latest poll, Mr. Lula da Silva remains in the lead, at 35 percent, Mr. Gomes' support has slipped to 21 percent and Mr. Serra's has risen from 11 percent to 17 percent. And on Monday, a group of 16 international banks said they would maintain current commitments to Brazil, including trade credits. Last week, markets got a boost after Brazilian President Fernando Henrique Cardoso said that Messrs. Lula da Silva and Gomes stated their support for the general guidelines of the IMF loan.

Also, Brazil's benchmark government bond has strengthened 19 percent since Aug. 13, while the real has risen 6.2 percent since Aug. 8.

Still, the real has fallen 26 percent this year, and may weaken more if the government isn't able to refinance $1.5 billion in Treasury bills that come due Monday. And with every percentage point decline in the real, Brazil's public debt denominated in dollars, which is 40 percent of the total, rises by about $1.4 billion. Brazil's bonds, stocks and currency have dropped by about a quarter this year. And since Brazil's interest rates are the world's highest when factoring for inflation, payments on Brazil's $318 billion in public debt are particularly tough to make.

Each month, Brazilian companies face debt obligations of about $2 billion, with $16 billion in loans coming due over the next five months. Given this scenario, Brazil will face a total balance of payments gap of $14 billion in October, while IMF funds will give the Central Bank $16 billion in additional funds. Of the $30 billion in new IMF money, only $3 billion will be distributed soon.

The recent market volatility will probably continue until Brazil chooses a new president. And since some big-name U.S. banks, such as Citigroup and FleetBoston, have a heavy exposure in Brazil, continued turbulence could affect Wall Street. For this reason, the Treasury Department should broker the next round debt-restructuring talks a role it has rejected so far. Also, Treasury should begin to look for long-term plans for weaning countries like Brazil off their IMF addictions. A proposal by the IMF's Anne Krueger for instituting country bankruptcy guidelines could serve as a rough draft.

For the moment, Brazil appears poised for quite a wild ride, with movement toward recovery difficult to foresee. Perhaps a caipirinha is in order.

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