Panic strikes Brazil market
The main market index, the Bovespa, had gained nearly 8 per cent ahead of his remarks, but it quickly went into reverse and ended the day down 1.77 per cent at 6,783 points.
The market had risen 18 per cent on Tuesday on hopes of a $27bn IMF rescue. The move by the Brazilian authorities to raise interest rates to 50 per cent also calmed nerves.
However, analysts say investors are far from reassured. On Tuesday George Soros, the investor and speculator who has admitted to losing $2bn in last month's Russian collapse, appealed for Congressional support for President Clinton's effort to mount a co-ordinated international effort to stop the crisis spreading from Asia and more recently Russia to Latin America and other eastern European economies.
Mr Soros warned Congress that there was "general panic" in Latin America. The flight of capital, he said, had now spread to Brazil. He added: "If Brazil goes, Argentina will be endangered."
Since Russia's devaluation and default, capital flight from Brazil has accelerated. On some days, say analysts, it has reached between $2bn and $3bn a day.
The rate rise has eased some pressure, but only at the cost of increasing the country's difficulty in servicing a debt burden which accounts for 55 per cent of GDP and is rising.
Concern about the overall financial stability of Latin America has already lead to devaluations in Colombia, Venezuela and most recently Ecuador. However, Brazil is crucial because of the size of the economy - it is now the eighth largest in the world - and because many of the banks and hedge funds badly burnt on Russia are also heavily exposed there.
Credit Suisse, which has disclosed after-provisions exposure of $2.2bn to Russia, also has $1.74bn of exposure to Brazil. Shares in Deutsche Bank, one of the biggest lenders to Russia, fell yesterday after the bank refused to satisfy analysts' curiosity about its Latin American position.
While Brazil is far more stable politically than Russia, the country has presidential elections on 4 October. These may make it harder to agree the kind of austerity package an IMF bail-out would need. Pessimists also worry about the fact that much of Brazil's debt is held by federal and municipal authorities which may refuse to back debt reduction plans.
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