Brazil Devalues currency (fwd)

[Robert Weissman <rob@essential.org>]

________
     Brazil devalues cherished real to fight crisis 
	Reuters, 1/13/99

By William
     Schomberg BRASILIA, Jan 13  - Brazil, desperately
     seeking a way out of a deep financial crisis, effectively devalued its
     inflation-busting real currency by nearly eight percent on Wednesday
     after Central Bank President Gustavo Franco said he would resign. 

     The dollar rose by 8.6 percent against the real -- an effective real
     devaluation of roughly 7.5 percent -- immediately after the Central 
Bank
     removed a tight mini-band in which the currency had previously traded. 

     The real was trading at 1.3/1.315 reais to the dollar, close to a new 
floor
     of 1.32 immediately after the announcement of the new wider band. The
     real closed at 1.2110 to the dollar on Tuesday. 

     Financial markets around the world were already in turmoil before
     Wednesday's announcement amid fears that Brazil would not be able to
     keep a grip on the real amid huge dollar outflow. 

     "This had been anticipated. The markets were nervous about it all
     morning and there's relief it's not worse," said Ravi Bulchandani, head 
of
     global currency strategy at Morgan Stanley Dean Witter in London. 

     Brazil's foreign exchange policy has served as the anchor of the
     country's four-year economic recovery after decades of high inflation. 

     Markets have long considered the real overvalued but feared a
     devaluation might spark the kind of crisis of confidence among 
investors
     that plunged Russia and much of Asia into chaos after they bungled
     devaluations last year. 

     The dollar dropped more than one percent against the euro in Europe as
     markets worried about how a full-blown crisis in Latin America's 
biggest
     economy would affect the United States, which sends 20 percent of its
     exports to the region. 

     Gustavo Franco, a staunch defender of Brazil's previously rigid foreign
     exchange policies, said he recognised the world's eighth largest
     economy needed to change its controversial economic policy mix of an
     overvalued currency and high interest rates. 

     "For some time I have seen the need for flexibility in interest rate 
policy
     and foreign exchange," Franco told a news conference after announcing
     his resignation. 

     He said the Central Bank's Director of Monetary Policy Francisco Lopes
     would take over at the bank. 

     "The loss of a person like Franco is in itself negative," said Carlos
     Kawall, chief economist at Citibank in Sao Paulo. 

     "The important things is the confirmation of Francisco Lopes to replace
     him, which signifies continuity and reduces somewhat the negative
     impact since he's in the same group." 

     Franco took over control of the Central Bank in August 1997 and had
     been heavily involved in Brazilian economic policy for several years
     before that as a director at the bank. 

     His resignation came after a dismal Tuesday that saw nearly $1 billion
     flood out of Brazil's foreign exchange markets, a level unseen since 
late

     last year when only a huge package of international loans prevented a
     devaluation. 

     Brazil'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. 

     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, a move that roiled the world's 
financial
     system and undermined confidence in Brazil, which is saddled with a
     budget deficit equal to nearly eight percent of gross domestic product. 


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