Early this morning -- 9 a.m. in Brazil and 6 a.m. in New York --Brazilian President
announced that the central bank president resigned and is being replaced by the chief of monetary policy at the central bank,
, and that the "outer band" of the dollar/real is widened by 8.96%. This is a de facto devaluation.
is voting today on a bill that will call the 27 provincial governors to a summit meeting. There, they will be sternly reminded that to declare a moratorium on debt payments makes Brazil look like the irresponsible old Brazil -- and not the new, respectable Brazil that the
went out of their way to trust with "pre-emptive" funding just last December.
The problem is, the market isn't buying the World Bank/IMF perspective and voted with its feet -- the Sao Paulo stock market opened late and promptly tanked 10%, triggering the suspension of trading. It has already recovered by the early afternoon, however, and is down only 3.5% on the day.
Yesterday, the capital outflow from Brazil was cited as $988 million, revised today to $1.214 billion -- a far cry from Monday's $191 million. Naturally, observers in the U.S. predict that the U.S. stock market will react negatively again, and a falling
will drag the dollar down with it again for the second day. We have already heard this morning that a European central bank intervened to slow the rise of the euro. A German
official told the press that the
is on the phone, and
canceled a speaking engagement to stay home and mind the store.
Call Me Jaded
Maybe I am a victim of Brazil fatigue, but this whole thing looks overdone. Critics of the IMF pre-emptive funding have been saying all along that the amount of fiscal tightening necessary to offset a real that is too high -- and an interest rate that is too low -- is just too much to expect. Therefore, interest rates have to rise and the real has to be devalued on an accelerated schedule.
If they don't, then the IMF plan fails and the U.S. will have to ante up a rescue package, since the European members of G7 continue to believe that anything that goes wrong in the Western Hemisphere is the U.S.' sole responsibility. To be fair, French Finance Minister
and German Finance Minister
write in an article to be published tomorrow in
magazine that the G7 has the responsibility to take action against any New World shocks. But in practice, the ball is in the U.S.' court.
A Tempest in a Teacup
Of course, if the market chooses to scare itself with a fresh crisis, that's its business. But I don't understand what all the fuss is about; the situation is, after all, easily fixed. All Brazil has to do is reimpose capital controls to stop the outflows and devalue the real another 10% or so to meet economists' estimates of where it belongs. Then, they rein in money supply and raise interest rates to stifle inflation and get another new line of credit from somewhere.
To be sure, it has to take all of these actions simultaneously, and wholeheartedly. That risks displeasing the IMF, of course, which likes to pretend that emerging-market countries can adopt developed-country financial market conditions without undue risk. Well, they can't. To acknowledge their structural shortcomings is only to set oneself up for disappointment.
The Immediate Effects
For investors, the real earnings effect from Brazil alone is negligible. Major multinational corporations have long experience in dealing with emerging markets' currency and capital controls. Maybe
will sell fewer cans and
will sell fewer computers, and they'll have to wait longer to get their dividend, and so what?
The real danger from a lingering crisis in Brazil is the knee-jerk selloff of all Latin securities, followed by the wholesale dumping of
emerging-markets securities. These days that can happen in a nanosecond, leaving diehard emerging-market funds holding a much-devalued and illiquid bag. And there's the rub: Somewhere out there is a fund or two really overinvested in this paper (yes, the ghost of
lives on). If so, then one can expect
(who was in China yesterday) to calm the markets, and maybe even cut rates again, too, if necessary to save the guys on the margin. A unilateral rate cut would, after all, weaken the interest-rate differential in favor of the dollar and ease the dollar lower. If this is how the "crisis" plays out, then there are some delightful buying opportunities ahead.
The Inevitable Aftershocks
In the grand scheme of things, though, what's serious about this developing crisis has nothing to do with Brazil or even the IMF, but rather the U.S.' role as bailout patsy. The rise in the euro on the Brazil news plainly reveals that Europeans -- while happy to tout the euro as a replacement reserve currency for the U.S. dollar -- still try to exempt themselves from the costs and responsibilities of true world financial leadership.
If the G7 doesn't stand together on Brazil, then
, and the U.S. Treasury may not be so laissez-faire about the euro going forward. How about new lines of credit for Brazil in euros, or requiring Brazil to issue new debt in euros and making the European central banks buy it? Expect Britain and Japan to side with the U.S., along with Canada, whatever that side turns out to be. If Euroland remains isolated and aloof on this issue, then that can't, in the long run, be good for the euro.
Alas, in the short run, it is all too good for the newborn currency. But what if it presses upward to the point of strangling exports? Perhaps it gets too expensive to attract those investment flows, too.
was right when he said the introduction of the euro would make the foreign-exchange market more volatile rather than less. Europeans are far more sophisticated about currencies than their U.S. counterparts, but even they will have a hard time dealing with a currency that bounces as much as the euro already has and that looks set to do some more.
Barbara Rockefeller is the principal behind Rockefeller Treasury Services, a Stamford, Conn.-based independent research firm specializing in foreign exchange forecasting and best-practices currency management. Through proprietary modeling systems which identify trends, RTS has successfully advised major multinational corporations and global fund managers since its inception in 1991. At the time of publication, she held no positions in the currencies or instruments discussed in this column, although positions can change at any time. She can be reached at her investing
Web site or via email at