Published yesterday, October 22, in the Diário Oficial (Federal Official Gazette), the Temporary Measure (MP) 443, which allows the state purchase of Brazilian banks with liquidity difficulties caused panic in the market and contributed to a 10.03% drop in the São Paulo Stock Exchange (Bovespa).
This is the opinion of some Brazilian economists. News of recession in England also caused a worsening of the situation.
According to Yoshiaki Nakano, director of the São Paulo School of Economics at Getúlio Vargas Foundation (FGV), the form through which the measure was announced raised the market fear that financial institutions in the country were undergoing difficulties - which he said is not happening and should not take place.
Paulo Rabello de Castro, chairman of SR Rating, and Alexandre Schwartsman, chief economist of Santander bank for Latin America, agree with the statement.
The MP authorizes the Federal Savings Bank and the Bank of Brazil, Brazilian state-owned banks, to purchase participation in financial institutions all over the country that are having liquidity problems, without the need for a tender process. The measure was announced, in a press conference in Brazilian capital Brasília, granted by Finance minister Guido Mantega and Central Bank president Henrique Meirelles.
At the event, Mantega pointed out that no bank in the country is going broke, that the Brazilian financial system is solid and that the MP was only preventive, to solve "punctual liquidity problems", showing that the concern is in small institutions. "But, no matter what the situation, reception was bad. The market acted with mistrust; the announcement was too serious just for the 'rescue' of small banks," stated Rabello de Castro.
To the economist, what happened was that "we copied the drunken stupor of the foreign market, despite being sober". "We are not even dizzy, our banking system is very solid, concentrated. There are basically four large banks operating in the country. And they have all done their homework. It is a very different situation from that of the United States, England," stated Rabello de Castro. The economist also recalled the "aid" to Brazilian banks in 2001, promoted without so many spotlights, which minimized the market mistrust.
Alexandre Schwartsman adds that the acquisition of banks undergoing liquidity difficulties was already taking place in the private sector, a fact that was also recalled by minister Guido Mantega during the conference. "I do not believe that any bodies are going to be found floating in coming weeks," he evaluates. Regarding the solidity of banks, Schwartsman recalls the low leverage of financial institutions in Brazil and prudence. And, to him, the publication of the government MP generated doubt regarding this scenery.
Luiz Carlos Mendonça de Barros, former president of the Brazilian Development Bank (BNDES) during the term in office of former president Fernando Henrique Cardoso, agrees with the opinion of the economists, but believes that there are positive points in the Temporary Measure, mainly with regard to the transparency of information in the process. "The advantage is that nothing is going to be done under the table. It will all be evaluated and, I believe, the 'rescue' will only be offered if necessary," he adds.
To Mendonça de Barros, up to now the Central Bank of Brazil has acted correctly when facing the crisis. "All of the interventions in exchange rates, for example, were very efficient," he said. According to him, the institution understood that oscillation of the dollar was not connected to the economy of the country, but to domestic movement. "It is a new situation, variation of exchange rates is now independent from us," he says.
With regard to correct measures by the Central Bank, Schwartsman and Nakano mention the changes in compulsory deposits (funds that banks have to deposit at the Central Bank) to reduce the effects of the crisis in the country. "Liberalization (discounts granted by the federal government) of the deposit for institutions to buy smaller banks, for example, allowed for the transfer of liquidity which is very positive," stated the Santander economist.
Nakano goes further, saying that the answer to this kind of action, for example, is very fast. And he added that connecting the compulsory loan to the concession of credit to banks, for example, is also a good line to be worked. For the economist, the great matter now is the meeting of the Monetary Policy Committee (Copom), to take place on October 28th and 29th. The expectation is for maintenance of reduction of the benchmark interest rate. "Increasing it would be a great mistake," says Mendonça de Barros.
Temporary Measure 443 is broad, composed of seven articles, and includes all kinds of financial institutions, among them insurance brokers, social security organizations, capitalization companies, etc., in the aid plan.
The MP also allows the Federal Savings Bank to establish a company turned to the real estate sector, CaixaPar. According to Mantega, this measure should allow the bank to have share participation in civil construction companies, as happened in the past with the BNDES. According to Mantega, the objective is to strengthen the housing sector to maintain the good performance of the last two years.
Another point of the MP is that the Central Bank is authorized to trade papers of Central Banks worldwide, in swap operations (contracts that exchange income in interest for oscillation of foreign currencies). Conditions and limits for these transactions are established by the National Monetary Council (CMN).