Just one month ago,

Soros

emerging-markets fund manager Arminio Fraga described the shaky financial situation within and

IMF

bailout of Brazil as "trying to redesign a crashing plane in midair."

How prophetic. Brazil's central bank president resigned Wednesday amid a widening of the country's currency trading band against the dollar -- a de facto devaluation -- which the newly appointed central bank president,

Francisco Lopes

, said was aimed at gradually increasing flexibility in the country's foreign-exchange policy.

"This is an improvement in policy, not a breakdown of policy," Lopes told investors during a midday Wednesday conference call organized by

J.P. Morgan

. Lopes stressed that his country wasn't attempting to manipulate the real exchange rate, but rather allowing market forces to have more of an impact on the rate.

"We want the exchange-rate market to behave in a more free environment," Lopes said, adding that a more flexible trading range would bring stability to Brazil's embattled markets. Lopes said the new foreign-exchange policy will lead to a nominal -- or actual -- devaluation of the country's currency, the real, between 12% to 15% by the end of 1999.

"This will be the maximum devaluation allowed by the system in the next 12 months," he said. Lopes put the real devaluation of the currency between 8% and 10% in 1999.

Unfortunately, the Brazilian currency had already moved to the lowest end of the band during the day's hectic trading, raising the question of just how much lower the markets will drive the real.

"This is not very good news," says one prominent emerging-markets money manager. "It will take some of the pressure off Brazilian interest rates, but it raises the specter of how fast the devaluation will be. There are unfortunate similarities between Brazil of today and Mexico in '94," he says.

The chief worry, of course, is that troubles in Brazil will bring down other Latin American countries and their currencies. Mexico and Argentina, which fixes its peso at one-to-one to the dollar under an eight-year-old currency-board system, would suffer the most from the uncertainty facing Brazil.

The strategist says, however, that he's holding firm for the next few days on the rest of Latin America, particularly Argentina, which he believes has different -- make that "better" -- fiscal and borrowing credentials than its neighbor Brazil. "Argentina is still self-financing. It has the ability to borrow in euro-denominated bond markets, for one," he adds.

Plus, conventional wisdom regarding Argentina as Brazil's largest trading partner doesn't tell the whole story. Argentina is still a very closed economy, so as a percentage of its external sector, Brazil is "a big part of a small part of Argentina's GDP," says Raul Elizalde, global head and strategist of fixed income at

Santander Investment

.

"Today created a lot of opportunities for emerging-markets investors, but there's always the worry the market will drop even more," says Brad Aham, part of the global emerging-markets team managing funds at

State Street Global Advisors

in Boston.

"We've been buyers of several

Telebras

( RTB) cellular spinoffs

Telesp

(TCP) - Get Report

and

Tele Norte

( TCN), and Electrobras. In dollar terms, if Brazil became 20% to 30% cheaper from where they are now, we'd certainly be buyers" of those stocks, he says.

Still, Elizalde points to several potential triggers for panic over the next few days. The first is Brazilian interest rates: "If local rates stay around 30%, things could be all right." The second is capital outflows: "If more than $2 billion leaves the country, that's not a good sign." (Elizalde says he's heard rumors that as much as $4 billion could flee the financial system. Another money manager puts the bar lower, at between $500 million and $1 billion, but still sees that as a troubling sign.)

Why? Because $2 billion would equal the latest chunk of money Brazil just got as part of its

IMF

disbursement. "It would be a very poor sign," he says.

Sentiment on Brazil turned from cliffhanger Wednesday morning to sanguine caution by afternoon. But that doesn't change the fact that some on the Street are convinced Brazil is on its way to cutting the real loose to become a free-floating currency, rather than maintaining the sliding currency band. "Quite possibly, the sooner, the better," says Richard Tobin, global portfolio trading strategist at

Salomon Smith Barney

. "Every day that they try to continue the band, it will only make it worse as reserves are depleted."