Brazil abandons currency defence as IMF talks begin

BRAZIL'S GOVERNMENT gave up its defence of the indefensible and allowed its currency to float yesterday.

The real fell to 1.58 to the dollar before stabilising as Pedro Malan, the Brazilian finance minister, and Francisco Lopes, the new central bank governor, flew to Washington for talks with the US Treasury and IMF. Fernando Henrique Cardoso, the President, was forced to break his holiday for the second time this week.

European finance ministers, meeting Asian counterparts in Frankfurt, signalled a calm response to the crisis in Brazil. "This crisis is manageable," said Yves-Thibault de Silguy, the EU's monetary commissioner.

But in the light of events this week, they will today discuss proposals put forward by Britain late last year for reforms to the international financial system.

The world's stock markets gave a huge sigh of relief at the end of a tense week. Brazil's Bovespa index surged 29 per cent at one stage.

In London the FTSE 100 index ended nearly 121 points higher at 5,941.0 after a day of ups and downs. It had earlier fallen as low as 5,736.8. The Dow Jones index had jumped more than 135 points to 9,256.36 by mid- morning.

The moves reflected the assumption that Brazil would be able to cut its 29 per cent interest rates, boosting economic prospects. Michael Hughes, head of emerging markets at Robert Fleming, said: "Now they have given up the defence of the currency, interest rates should be able to come down in the medium term."

However, many analysts remain uncertain about prospects. Brazil's central bank said it would make an announcement about new foreign exchange arrangements on Monday.

Joaquin Cottani, an economist at Lehman Brothers in New York, said: "There will be a period of uncertainty, and interest rates cannot come down as long as the instability lasts."

A bigger fear was that the recession and turmoil in Brazil would spill over into Argentina and Mexico, both far more important for the US. Ford said it would be cutting 4,600 jobs across Latin America as a result of the crisis.

The IMF and US, which pushed through the $41.5bn rescue package for Brazil over the objections of other G7 governments, were not consulted in advance about this week's developments. They are likely to demand fresh tax rises or spending cuts to counter the inflationary effects of the 25 per cent devaluation of the real this week.

The markets expect the package to be renegotiated. "Brazil needs the IMF, but the IMF also needs Brazil. It cannot afford a repeat of Russia," said Neil Dougall, Latin American economist at Dresdner Bank.

But there was scepticism about prospects for a tougher counter-inflationary budget. Chris Huhne of Fitch-IBCA, the ratings agency, said: "The question is whether the political system can actually deliver on the necessary timescale."

Investors are also concerned about the increased risk of either defaults on debt by the Brazilian government and corporate sector, or the possibility of exchange controls to halt the massive flight of capital out of the country that has reached $7bn so far this month.

PROMOTED VIDEO
News
ebooksAn unforgettable anthology of contemporary reportage
News
Bourgogne wine maker Laboure-Roi vice president Thibault Garin (L) offers the company's 2013 Beaujolais Nouveau wine to the guest in the wine spa at the Hakone Yunessun spa resort facilities in Hakone town, Kanagawa prefecture, some 100-kilometre west of Tokyo
i100
Voices
Oscar Pistorius is led out of court in Pretoria. Pistorius received a five-year prison sentence for culpable homicide by judge Thokozile Masipais for the killing of his girlfriend Reeva Steenkamp
voicesThokozile Masipa simply had no choice but to jail the athlete
Arts and Entertainment
James Blunt's debut album Back to Bedlam shot him to fame in 2004
music

Singer says the track was 'force-fed down people's throats'

News
i100
Life and Style
The Tinder app has around 10 million users worldwide

techThe original free dating app will remain the same, developers say

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Helpdesk Analyst

£23000 per annum + pension and 22 days holiday: Ashdown Group: An established ...

Senior Helpdesk Analyst / Service Desk Co-ordinator

£27000 per annum + pension, 22 days holiday: Ashdown Group: An established ind...

Senior Pensions Administrator

£23000 - £26000 Per Annum: Clearwater People Solutions Ltd: Our client is curr...

Corporate Actions Administrator / Operations Administrator

£25 - 30k: Guru Careers: A Corporate Actions Administrator / Operations Admini...

Day In a Page

Two super-sized ships have cruised into British waters, but how big can these behemoths get?

Super-sized ships: How big can they get?

Two of the largest vessels in the world cruised into UK waters last week
British doctors on brink of 'cure' for paralysis with spinal cord treatment

British doctors on brink of cure for paralysis

Sufferers can now be offered the possibility of cure thanks to a revolutionary implant of regenerative cells
Let's talk about loss

We need to talk about loss

Secrecy and silence surround stillbirth
Will there be an all-female mission to Mars?

Will there be an all-female mission to Mars?

Women may be better suited to space travel than men are
Oscar Pistorius sentencing: The athlete's wealth and notoriety have provoked a long overdue debate on South African prisons

'They poured water on, then electrified me...'

If Oscar Pistorius is sent to jail, his experience will not be that of other inmates
James Wharton: The former Guard now fighting discrimination against gay soldiers

The former Guard now fighting discrimination against gay soldiers

Life after the Army has brought new battles for the LGBT activist James Wharton
Ebola in the US: Panic over the virus threatens to infect President Obama's midterms

Panic over Ebola threatens to infect the midterms

Just one person has died, yet November's elections may be affected by what Republicans call 'Obama's Katrina', says Rupert Cornwell
Premier League coaches join the RSC to swap the tricks of their trades

Darling, you were fabulous! But offside...

Premier League coaches are joining the RSC to learn acting skills, and in turn they will teach its actors to play football. Nick Clark finds out why
How to dress with authority: Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear

How to dress with authority

Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear
New book on Joy Division's Ian Curtis sheds new light on the life of the late singer

New book on Ian Curtis sheds fresh light on the life of the late singer

'Joy Division were making art... Ian was for real' says author Jon Savage
Sean Harris: A rare interview with British acting's secret weapon

Sean Harris: A rare interview with British acting's secret weapon

The Bafta-winner talks Hollywood, being branded a psycho, and how Barbra Streisand is his true inspiration
Tim Minchin, interview: The musician, comedian and world's favourite ginger is on scorching form

Tim Minchin interview

For a no-holds-barred comedian who is scathing about woolly thinking and oppressive religiosity, he is surprisingly gentle in person
Boris Johnson's boozing won't win the puritan vote

Boris's boozing won't win the puritan vote

Many of us Brits still disapprove of conspicuous consumption – it's the way we were raised, says DJ Taylor
Ash frontman Tim Wheeler reveals how he came to terms with his father's dementia

Tim Wheeler: Alzheimer's, memories and my dad

Wheeler's dad suffered from Alzheimer's for three years. When he died, there was only one way the Ash frontman knew how to respond: with a heartfelt solo album