crisis brewing in Brazil

[Robert Weissman <rob@essential.org>]

                        Fears of Brazil crisis rattle world investors

                        January 13, 1999 
                        Web posted at: 8:29 AM EST (1329 GMT) 

                        BRASILIA, Brazil (Reuters) -- Brazil, struggling
to avoid an Asia-style financial collapse, faced
                        a critical day on Wednesday amid media reports
that the head of its central bank would resign and
                        speculation the country might devalue its
currency. 

                        Concerns about Brazil and the potential ripple
effects on the world economy rattled investors
                        around the world and hurt stock prices across
Europe. 

                        "This is going to be a critical test for Brazil,"
said Scott Schwager, an emerging market strategist
                        at Deutsche Bank in London. 

                        Local media said Central Bank president Gustavo
Franco, one of the architects of Brazil's
                        four-year economic recovery and the staunchest
defender of the country's controversial foreign
                        exchange policy, had asked to resign. 

                        A central bank spokeswoman declined to comment
before Franco gave a morning news
                        conference. 

                        The news conference was called on Tuesday to
announce what officials described as a routine
                        widening of the band in which the Brazilian real
currency -- widely seen as overvalued --
                        gradually depreciates against the dollar. 

                        Resignation rumors involving top-level economic
officials are an almost weekly occurrence in
                        Brazil, the world's eighth-largest economy. But
the speculation over Franco reached a new peak
                        on Wednesday morning when two daily newspapers and
national Globo television said he would
                        quit. 

                        The reports came after a dismal Tuesday which saw
nearly $1 billion flood out of Brazil's foreign
                        exchange markets, a level unseen since late last
year when only a massive package of
                        international loans prevented a devaluation. 

                        "There is only one burning question in the market
today and that is what the Brazilians are going
                        to say later in the day -- whether there is going
to be a currency devaluation or not," said a
                        currency trader at a U.S. bank in London. 

                        The country's latest crisis began last week when a
rogue state governor announced a 90-day
                        moratorium on debt payments to the central
government. 

                        While the sums involved were small, the move
raised fears a crucial austerity drive could be
                        derailed and that concern snowballed into panic by
Tuesday. 

                        The U.S. dollar fell as markets worried about the
impact a full-blown crisis in Latin America's
                        biggest economy might have on the United States.
Some 20 percent of U.S exports go to the
                        region. 

                        The dollar weakened on Wednesday to $1.1642/52 per
euro, Europe's single currency, from
                        $1.3873/83 and $1.1554/63 late in Europe on
Tuesday. It also retreated to 111.40 Japanese yen
                        from Wednesday peaks of 112.75 and Tuesday's late
European close of 112.03. 

                        Blue-chip stocks in Spain, where several top
companies have hefty Brazil investments, fell more
                        than 5 percent. 

                        "The market thinks Brazil might go for an early
devaluation to try to save what's left of their
                        reserves or opt for a currency board. It's all
very uncertain," a London analyst said. 

                        Brazil's foreign currency reserves are believed to
be about $35 billion, not including a first $9
                        billion tranche of loans freed up by the
International Monetary Fund and industrial nations last
                        month. 

                        The reserves have plunged from nearly $70 billion
before Russia defaulted on its debt in August
                        which roiled the world's financial system and
undermined confidence in Brazil, which is saddled
                        with a budget deficit equal to nearly 8 percent of
gross domestic product. 

                        With the reports of Franco's resignation coming at
such a sensitive time for Brazil, markets
                        around the world were braced for what could be
dramatic day. 

                        "With outflows like yesterday's Brazil has been
under a lot of pressure," Schwager said, "With
                        $44 billion in reserves, it's a question of how
long Brazil can sustain the outflows." 

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