Communicative, resourceful, stable and sober -- the qualities the market demands from a central banker are much the same as those a wife expects from her husband.


Arminio Fraga

-- approved as Brazil's central bank president Wednesday -- show these characteristics and persuade investors to stick with the country as it goes through its worst economic crisis this decade?

With the recently devalued real tumbling and inflation surging, his chances look slim. But divorce is not inevitable. It'll be nightmarishly tough to keep the market on Brazil's side -- but not impossible.

High hopes have been placed on Fraga, who previously worked as an aide to

George Soros

, the hedge-fund investor and philanthropist. The move from

Soros Fund Management's

plush midtown Manhattan HQ to the gloomy corridors of a Brasilia bureaucracy is a big adjustment. But Fraga is no stranger to Brazil's architecturally challenged jungle capital; he did a short stint at the central bank in the early '90s under President

Fernando Collor de Mello


Brazilian Brady bonds rallied when President

Fernando Henrique Cardoso

proposed Fraga for the governor's post in early

February. Officially, he's had to sit on the sidelines since then, until the


approved his appointment. But behind the scenes he has had a strong say on monetary and exchange-rate policies over the past month, according to Brazil watchers.

So far, he's gotten good reviews from a fair chunk of the financial community's cognoscenti. This, however, could have more to do with Wall Street's still-uncured need to believe that Brazil's problems aren't


bad -- and that one man can solve them.

Cardoso, on whom economists and commentators previously bestowed this savior status, is now discredited as a vacillating compromiser, a reputation that was strengthened this week with his appeasement of state governors who had threatened to default on their debts to the federal government.

Finance Minister

Pedro Malan

, another once-feted star on the international finance circuit, has lost a lot of his stature since the

International Monetary Fund

agreed last year to provide $42 billion in emergency financing if Brazil cut its ballooning budget deficit. Malan could have regained some of his luster by pulling some high-profile privatizations out of the hat, as the Brazilian press had reported he would. But in an announcement Wednesday, the president's office ruled out selling oil monopoly


and two large state-owned banks.

So that leaves the spotlight on the unassuming Senhor Fraga.

An Inauspicious Start

The market got all excited about his appointment because it assumed that Fraga, with his background as a hedge-fund trader, would know how to handle the newly free-floating currency.

If he has indeed been conducting forex policy since early February, Fraga has had a disappointing beginning.

The real, trading around 2.19 to the dollar Wednesday, has dropped nearly 45% since it was unpegged from the greenback. A fast-falling exchange rate creates huge upward pressure on inflation as Brazilian firms push up prices to try to maintain some of the dollar value of their sales.

The central bank has, over the past two weeks, sporadically intervened in the forex market in small amounts to slow the currency's decline. But these interventions have not stopped the slide. In fact, they may have worsened the situation. If speculators see the central bank selling dollars at a rate they think is too cheap, they'll scoop them up, gladly dumping reals in Fraga's lap in the process.

To be fair to Fraga, it hasn't been possible for him to publicly push a far-reaching framework for monetary and forex policy. First, he couldn't boldly strike out with initiatives before gaining Senate approval, as this would have further angered leftist senators who were appalled at the prospect of having an ex-Soros hand at the helm of the central bank.

Second, and more importantly, Fraga needs to work in close conjunction with the IMF. He can't say anything significant until the Brazilian government and the IMF issue their new set of policies to deal with the crisis. Details of the package have been dribbling out this week, and should be officially announced in one batch later this week.

Clearly, the central bank, the government, the IMF and the Brazilian people have arrived at a major crossroads in the crisis this week.

And this is the big challenge facing Fraga in particular.

One Huge Confidence Game

He needs to suppress inflation, currently running at an annualized 64%. In order to do that, the currency slide needs to be halted. This can be done by raising interest rates. On Wednesday, a high-ranking IMF official said rate hikes may be necessary. Brazil's key


rate is at 39%. If Fraga does decide to hike rates, he may do so as early as the Monetary Policy Council meeting on Thursday.

The problem is that higher rates will add to the government's huge interest costs, which account for the bulk of the government's fiscal deficit, currently equivalent to around 8% of GDP. If the deficit gets any higher, then panic could again erupt and send Brazilian markets plunging. What's more, higher rates could deepen this year's recession -- expected at around minus 4% to 5% of GDP -- and undermine public and congressional support for austerity measures.

Scientifically determining the right interest-rate level is impossible, as capital flows in and out of Brazil are currently driven more by sentiment than carefully weighed macroeconomic conditions. That creates a great -- but short-lived -- opportunity for Fraga to win over the market.

He could do a lot just by communicating well.

Whatever Fraga does with interest rates, he'll be criticized, as no consensus exists in the market over whether they should be raised or lowered. So, if he presents his policies cogently and responds directly to skeptics' concerns, he can settle nerves and even set the agenda in the monetary policy debate.

In addition, Fraga must come clean on exchange-rate policy. He has to give guidance on the intervention policy. Some analysts believe Brazil could adopt Mexico's system for reducing exchange-rate volatility, according to which the central bank there agrees to sell a known, predetermined amount of dollars (through options contracts) if the peso slips more than a certain amount. It doesn't keep the peso from dropping over the long term, but it helps slow down the slide.

Finally, it would be helpful if Fraga came up with plans to lengthen the maturity of Brazil's government debt, which currently rolls over every seven months or so. This must not take the form of a forced restructuring, which Fraga very sensibly ruled out in his testimony before the Senate. Instead, Fraga could coax investors into buying new, longer-term bonds. They could be inflation-linked, or have innovative structures that allow the government to save money as interest rates come down. The government could even go for a large offshore eurobond issue at much lower rates than it pays on reals.

None of this will be easy for Fraga. After all, good marriages take a lot of work, especially one that's been on the rocks for so long.