Despite Billions to Prop Dollar Brazil Real Drops over 30%

US dollar Brazil was forced to appeal to 22.9 billion US dollars in the past month, including sales of foreign reserves, derivatives and loans to prop the weakened Real punished by investors fleeing from emerging markets to more secure assets.

More over sales of reserves to buy the Brazilian currency in the spot market totaled 3.2 billion US dollars from October 8 to October 20, Central Bank President Henrique Meirelles said in testimony before congress. The other types of intervention, including loans and currency swaps, don't affect the level of reserves.

"Even smaller economies, like Mexico, have spent more than us," Meirelles said in Brasilia. Mexico's central bank bought 6.4 billion worth of pesos on October 10 alone to shore up the currency.

The Real has lost a third of its value against the US dollar since reaching a nine-year high August first, causing some of the biggest companies to report more than 5 billion reais (2.2 billion USD) of losses from bad currency bets. The Bovespa stock market index has fallen 32% in the period.

So far this month the Brazilian currency has dropped 20%, the third-worst performer among the 16 most-actively traded currencies, trailing only the South African rand and Mexican peso.

In a decree published Wednesday, October 22, Brazilian President Luiz Inácio Lula da Silva authorized the Central Bank to engage in currency swap transactions with foreign central banks. Brazil's international reserves stood before the crisis at US$ 200 billion.

In addition to foreign-exchange interventions, the Brazilian central bank has taken measures to inject more than US$ 71 billion in the banking system to ease a credit crunch that's hurting small and medium-size lenders.

Meirelles told Congress that bank lending fell 13% in the first eight business days of October from the same period the previous month.

However Latin America's largest economy is "performing well" amid the "severe" global credit crisis, Meirelles said. The government's debt as percentage of GDP has fallen because the country is a net dollar creditor, he said. Capital levels at Brazilian banks exceed the minimum amount required under the Basel guidelines, he added.

Meantime, Brazil's Finance Minister Guido Mantega also addressing congress said that economic growth in 2009 should slow to between 4 and 4.5% from an estimated 5% this year.

"Brazil's economy is more dynamic and has several comparative advantages over advanced economies," Mantega said. "The sole fact that only 13% of our GDP comes from exports is an advantage, we depend more on domestic demand than foreign markets, so we'll be less affected than China in case there's a reduction in global trade."

Mercopress

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