All eyes on Brazil as storm moves south

CITY ANALYSTS trying to predict how the next chapter in the global economic crisis will read will watch this week to see if Washington bails out Brazil.

"Last week was a roller-coaster in the markets," said Mohamed El-Erian, London head of emerging markets at Salomon Brothers Smith Barney. "We'll probably see more volatility this week."

Brazil is likely to bear the brunt of this volatility because a consensus has formed that it is the next emerging market from which international investors will race each other to withdraw funds.

Brazil has $50bn (pounds 30bn) in foreign reserves, but this is down from more than $60bn since July, and international investors do not like the country's domestic debt profile.

"Brazil has $250bn of domestic debt with an average maturity of seven months," said Mr El-Erian. "Sixty per cent is floating rate. As the government raises interest rates to 50 per cent to stop the outflow of funds from the country, this has immediate negative impact on the economy."

Officials from the Brazilian government, the US government, the International Monetary Fund, and the Inter-American Development Bank are in talks. There has been speculation that an emergency IADB loan could be made to Brazil this week.

Brazilian Brady bonds - bonds created through the repackaging of bank loans made to the country in the 1980s - moved up at the end of last week from 50 per cent to 60 per cent of their face value. "The market is pricing in a bail-out," said an analyst.

But there are concerns that the bail-out will not come until after the Brazilian presidential election on October 4, because the IMF is highly unpopular in the country.

"Time is of the essence," said Mr El-Erian. The risk, he suggested, is that if there is no quick bail-out for Brazil, the current flight of funds from there could spread to Argentina and Mexico, further depressing the export markets of the US and Western Europe.

Comments