The NYT wrote:
> American banks have about $25.6 billion in outstanding to loans to
> Brazilian borrowers. Citigroup, the biggest American lender to Brazil,
> has $9.7 billion in Brazilian loans.
The interesting thing about US banks lobbying to save Brazil in order to save their own interests is that is seems that Brazil's crisis was caused almost solely by the actions of these banks. The following is from an Finanical Times article/commentary from August 1 by Raymond Colitt and Richard Lapper:
<quote 1>
More generally, Brazil is a victim of an acute risk aversion among international lenders. In June, foreign banks rolled over only about 11 per cent of Brazilian commercial loans and papers, the lowest level since January 1999 when it was widely feared that the country was heading for a bout of very high inflation after the devaluation crisis. All the indications are that the situation became worse in July.
Domestic companies have been hit by credit lines being cut off. "It's a tremendous injustice. We have been paying foreign banks huge interest and then they cut off us off like that," says Joao Henrique Marchewsky, financial director of Buettner, a textile manufacturer that exports more than a third of its output.
Even though most Brazilian companies have lower levels of gearing than their US counterparts, few have been able to roll over dollar obligations of about $2bn (#1.2bn) a month. Many have been buying dollars to pay off debt. All that has forced down the value of the Real, which is now a third cheaper than it was in January.
<end quote 1>
And this was done why? For purely political reasons? Brazil had until that point been hitting all IMF targets.
Interestingly, capital flight has not played much of a role in the decline of the Real, despite O'Neill's spectacular aspersions:
<quote 2>
So far, there are no signs of massive capital flight or panic among ordinary citizens. Unlike Argentines earlier this year or Uruguayans more recently, Brazilians have not drawn their savings deposits and flocked to currency exchange parlours.
<end quote 2>
And even more interestingly, the main terrible effect of a drastically lowered exchange rate, namely a radical increase in the debt burden, seems to be a relatively smaller danger in Brazil's case, because:
<quote 3>
About four-fifths of the R750.3bn net public debt is denominated in domestic currency rather than dollars.
<end quote 3>
Although the article goes on to say that "Even so, currency weakness has a direct impact on servicing costs because about a third of the Real- denominated debt is linked to the exchange rate" which I think essentially makes them into dollar-denominated debts as well in terms of burden.
But even if the debt burden kicks in and becomes a serious problem, it seems that would still be a secondary cause of the refusal to roll over loans. So at first sight, the entire Brazilian crisis seems to have been caused by the drastic actions of (largely American) banks. Which seems to me peculiar, since at first sight they should be less prone to unfounded panic than hot money investors, and when they started this, Brazilian fundamentals were sound. At least until they started undermining them.
Any commentary from more knowledgeable heads would be greatly appreciated.
Attached below is the entire FT article for reference. (I'd link it but I can't.) The NYT article that the first quote comes from was posted earlier.
Financial Times; Aug 02, 2002
COMMENT & ANALYSIS: Brazil faces old demons
By Raymond Colitt and Richard Lapper
Is Latin America about to relive the debt crisis of 20 years ago? Even a few weeks ago the question would have seemed excessively alarmist; now, with currencies plunging and bond yields rising, that fate no longer looks so remote. "This is the most hostile global environment I have ever seen," warns Casper Romer, a director with Foreign & Colonial, the London-based fund manager.
Following the Argentine debt default and devaluation at the end of last year, two countries are affected: Uruguay and Brazil.
Uruguay's decline has perhaps been the most dramatic: six months ago, its credit rating was investment grade. But Uruguay's banks are a traditional haven for middle-class Argentines, who accounted for about 60 per cent of all private-sector deposits until capital controls at home forced them to raid their Uruguayan savings. As a result, reserves have shrunk, falling more than 50 per cent in July alone. This week bank deposits were partly frozen as the government sought to head off a financial collapse.
But Brazil, whose economy accounts for 40 per cent of the regional output, remains the bigger worry. Spreads over US Treasuries -awidely accepted measure of political risk - have risen to more than 20 per cent, levels reached in Argentina only weeks before last December's crisis. At one point this week the Real had fallen by 15 per cent against the dollar in just over two days.
"We were expecting volatility ahead of the elections but nothing like this - just imagine, a dollar at R3.40," laments Vilmar da Costa, finance director with Hering, the country's largest clothing manufacturer.
Political uncertainty is without doubt contributing to Brazil's problems. Foreign investors started to worry in May when Luiz Inýcio Lula da Silva of the leftwing Workers' party built a significant lead in the opinion polls. In the last few weeks the position of Josý Serra, President Fernando Henrique Cardoso's chosen successor, has weakened even further and Ciro Gomes, a sometimes unpredictable centre-left politician with whom Mr Cardoso has had an uneasy relationship, has gained ground. Mr Gomes' campaign is backed by the rightwing Liberal Front party, which this year deserted the governing multi-party alliance.
More generally, Brazil is a victim of an acute risk aversion among international lenders. In June, foreign banks rolled over only about 11 per cent of Brazilian commercial loans and papers, the lowest level since January 1999 when it was widely feared that the country was heading for a bout of very high inflation after the devaluation crisis. All the indications are that the situation became worse in July.
Domestic companies have been hit by credit lines being cut off. "It's a tremendous injustice. We have been paying foreign banks huge interest and then they cut off us off like that," says Joýo Henrique Marchewsky, financial director of Buettner, a textile manufacturer that exports more than a third of its output.
Even though most Brazilian companies have lower levels of gearing than their US counterparts, few have been able to roll over dollar obligations of about $2bn
(ý1.2bn) a month. Many have been buying dollars to pay off debt. All that has forced down the value of the Real, which is now a third cheaper than it was in January.
The danger now is that this turmoil is beginning to have an impact on the real economy, undermining Brazil's ability to service a growing debt burden. About four-fifths of the R750.3bn net public debt is denominated in domestic currency rather than dollars. Even so, currency weakness has a direct impact on servicing costs because about a third of the Real- denominated debt is linked to the exchange rate.
The instability is affecting debt dynamics in other ways too. The weaker currency has increased inflationary pressure. Overnight interest rates already stand at 18 per cent; further monetary tightening may follow.
High interest rates have already slowed growth - private sector forecasters predict an expansion of only 1.7 per cent this year. Depressed tax revenues make it more difficult for Brazil to achieve tough budgetary targets agreed with the Inter-national Monetary Fund.
So far, there are no signs of massive capital flight or panic among ordinary citizens. Unlike Argentines earlier this year or Uruguayans more recently, Brazilians have not drawn their savings deposits and flocked to currency exchange parlours.
Even so, some analysts belive that these "debt dynamics" are so grim that Brazil should seek to restructure its foreign debt immediately. "The Cardoso government should move to the next step and start restructuring the debt," argues Walter Molano of BCP Securities in New York. "The market already knows that the final outcome is inevitable."
The government insists it will not come to that. "There is a flagrant overshooting of the dollar," says Pedro Malan, finance minister. "Nobody can seriously believe the Real will remain at these levels."
With net reserves of about $25bn, Brazil has the resources to defend its currency for a while. The government hopes it will be enough to ride out the present crisis and plans to press ahead with efforts to restore confidence. Brazil is also on good terms with the IMF. Some $10bn of a credit line originally agreed in September was disbursed in June and it has already begun discussions on a deal that would extend into next year, potentially bringing it extra money.
Last, its strong record of fiscal management - it has regularly met IMF targets - and the flexibility of its exchange rate regime make its circumstances quite different from those that brought Argentina to grief. The depreciation of the Real is helping to increase the trade surplus, easing some of the external pressures.
Brazil is not finished yet but the stakes remain high. Because the government has implemented reform with discipline, economic collapse would be devastating to the cause of market-friendly economics across the region. But neither the domestic political uncertainty nor the risk aversion of international investors seems likely to lift soon.