SUNS  4355 Tuesday 19 January 1999

Brazil: Stock market slide accelerates



Rio de Janeiro, Jan 14 (IPS/Mario Osava) -- The decline of stock markets in Brazil, the new epicentre of the global financial crisis, accelerated Thursday due to a crisis of investor confidence in the strength of the local currency, and the resignation of another senior Central Bank official.

Sao Paulo closed 9.96% down and Rio de Janeiro 9.0% down Thursday - nearly double the losses of 5.04 and 5.56% seen Wednesday - which contributed to the more than two percent slide in New York Thursday.

The initial panic caused by a nearly nine percent devaluation in Brazil began to die down on the global markets after a sharp impact late Wednesday, but the instability and fears over the future of the Real, the local currency, continued to affect trading.

Brazil's stock markets suffered a new interruption of trading Thursday afternoon, after overcoming a 10% plunge, similar to what occurred Wednesday in the wake of the news of the devaluation.

The Central Bank's director of norms and oversight, Claudio Mauch, announced his resignation, which accentuated the widespread jitters.

Mauch cited personal reasons for his resignation, which he had announced in September, and said his decision had nothing to do the new exchange rate policy nor Gustavo Franco's replacement by Francisco Lopes as Central Bank president.

The continued heavy flood of capital out of Brazil, which forced the Central Bank to sell off part of its currency reserves, was one of the most disturbing developments, which kept the dollar at the upper limit of the new band announced Wednesday: 1.32 Reals.

Traders also cited the downgrading of Brazil's foreign-denominated debt bonds by the U.S. credit-rating agency Standard & Poor's Fund Research.

The Sao Paulo stock exchange, Latin America's biggest, started the  day on a bullish note, with a more than four percent rise. But the tendency turned around in the afternoon, and the Bovespa index crashed in the last two hours of trading after Mauch's resignation was made public.

In the rest of the world, however, markets appeared to be getting back on an even keel. In Europe, indexes ranged between London's 0.51% dip and the 0.97% rebound seen in Paris - nothing comparable to Wednesday's heavy losses.

Asia suffered losses, but in a continued reaction to the initial impact of the new band in which the Brazilian Real trades, and with only minor fluctuations - with the exception of Manila, which saw a slump of 4.8%, and Seoul, where prices fell 4.52%. Tokyo saw a 2.5% rally.

Markets also appeared to be on the mend in Latin America, despite the heavy fallout from Brazil, where stock exchanges continued experiencing wild swings Thursday.

The most sensitive thermometer now is the outflow of capital from Brazil. The $1.1 billion withdrawn Wednesday was just one-third of the flow predicted by the gloomiest forecasts.

But the continued capital flight Thursday and fears that it would remain unchecked over the next few days heightened the uncertainty regarding Brazil's ability to limit the devaluation to the nine percent allowed by the new exchange policy.

Jitters are natural while the measure is being assimilated, said presidential spokesman Sergio Amaral, who stressed that Congress approved four measures Wednesday night, which he described as an indication of the steady advance of the fiscal adjustment plan that sustains the country's economic policy.

But the devaluation was implemented at "a risky moment," and modifications in exchange rates only prove successful if they earn the confidence of markets at home and abroad, said former finance minister Mailson da Nobrega.

Without that credibility, Brazil - the world's eighth largest economy - could face a financial collapse similar to that suffered by Mexico in 1994, and be forced to undertake new, uncontrolled, devaluations, he warned, reflecting the fear of those who are also familiar with the situation in Asia over the past two years.

Brazil devalued its currency, allowing it to float within a wider band, from 1.20 to 1.32 Reals against the dollar, under heavy political lobbying at home for a reduction of interest rates - some of the
highest in the world - and amidst a growing withdrawal of capital.