Brazilian Finance Minister Compares Global Crisis to 1929 Crash

Brazilian minister Guido Mantega Brazil's Finance minister, Guido Mantega, believes that the Brazilian economy should suffer a little more with the consequences of the global crisis due to the reduction of credit on the international market.

In an address to the National Congress, Mantega said that for 2008 the government still expects growth of 5% of the economy, but for the next year, the expansion of the Gross Domestic Product (GDP) should be smaller. "We should therefore grow between 4% and 4.5%," said the minister.

He stated, however, that the Brazilian economy has conditions to overcome the foreign financial crisis and recalled that the government should, if necessary, continue taking specific measures aimed at minimizing the effects of the international scenery.

"The economy of Brazil is solid and prepared to face the crisis. Brazil may maintain the current cycle of growth with the maintenance of expansion of credit, investment in infrastructure and continuation of the Federal Government's Growth Acceleration Program. We believe that the country may weather a large part of these problems, maintaining the economy with good operation. It will be lower growth, though enough to guarantee the country's growth trajectory," he said.

To Mantega, the global crisis has already lived its worst phase, which was cooled by the measures taken by the rich countries, defined by the minister as the epicenter of the crisis. However, he added that the crisis is far from ending. "I do not believe that this crisis is finishing. It is a long-term crisis which is still going to cause us many headaches," he said.

The seriousness of the global crisis, according to the minister, only has a parallel in the 1929 crisis, with the Wall Street Crash. "We are facing an international crisis that is much stronger than the crises that took place in the 1990s, that is only similar to the 1929 crisis. Not due to its characteristics, as the reasons are different, but due to the repercussion," he pointed out.

According to Mantega, the power for expansion of this crisis is due to the fact that it is taking place in the center of capitalism. "The current crisis is much more serious than 90, like the crisis in Mexico, Asia and Russia. Those crises were regional, not born in the financial center. This crisis has its epicenter in the more advanced countries. It is not a crisis of billions, but of trillions, in the heart of the capitalist system, the most advanced economies."

The minister also pointed out that the crisis does not affect all countries equally and considered that the emerging economies have greater conditions to face the effects on the international markets than do the economies of developed nations. "For many years developed nations have been growing more slowly. Their local markets are already saturated. Apart from that, these countries have less solid fundaments. The United States, for example, have a fiscal and commercial deficit," he said.

The countries with emerging economies, in Mantega's opinion, posted great growth in recent years and this is a sign that they have better chances to face the mishaps of the global economy. "Growth is a sign of economic robustness. Emerging economies may replace foreign activities for internal ones. The domestic market still has space for growth. In developed nations, the domestic market does not have much space for expansion, having grown over the time," stated the minister.

"China alone has almost 2 trillion dollars in reserves," pointed out the minister. He also pointed out that financial institutions in developing nations have lower leverage. "This means that they have fewer bad papers," he said.

With regard to Brazil, Mantega suggested that the country has great potential for growth of the domestic market and reserves in dollars of around US$ 200 billion. Even the fact that the country exports little, at this moment, is a comparative advantage to the country, according to the minister. According to him, just 13% of the Brazilian GDP depends on exports.

Apart from that, Mantega also recalled the existence of high compulsory deposits. "This is considered an anomaly, and which now presents itself as something positive when compared with other nations," he said. According to Mantega, what is usual abroad is for banks to deposit from 0% to 10% of their cash deposits in central banks. In Brazil, cash deposits at the Central Bank are as high as 53%. "This allows us to increase domestic credit in a moment of crisis."

The governor of the Central Bank, Henrique Meirelles, added that the measures adopted by the institution to face the appreciation of the dollar have totaled US$ 22.9 billion up to now. The total includes both the spending of dollars in international reserves and the operation of the monetary authority in the futures market.

According to a study presented at the Lower House, the direct sale of dollars in the national reserves alone reached US$ 3.2 billion.

The Central Bank also sold US$ 3.7 billion in engaged operations, in which financial institutions purchase dollars from the Central Bank and leave guarantees in exchange. This operation does not directly consume international reserves because, on maturity of the contract, the buyer returns the dollars and the monetary authority returns the guarantees.

With the exchange swap, which operates as sale of dollars on the futures market, the Central Bank spent US$ 12.9 billion. In this transaction, the CB bets on the appreciation of the dollar and on higher interest rates. In the end, both parties exchange revenues, which, in practice, brings investors gains with the appreciation of the North American currency.

The CB, according to Meirelles, also spent US$ 1.5 billion on not extending the reverse exchange swap. In this transaction, which took place up to last month, the operation was that of an inverted exchange swap. The CB bought dollars on the futures market, helping control the depreciation of the North American currency. With the appreciation of the dollar, this operation was no longer attractive to investors.

Loans in dollars abroad to expand foreign trade, with the auctioned on Monday (20), totaled US$ 1.6 billion. In these loans, authorized by Provisionary Measure 442, which expands the powers of the Central Bank, the monetary authority loans funds from the foreign reserves to institutions that operate abroad, under the condition that the volume be applied to credit to Brazilian exporters and importers. In exchange, the financial institution leaves guarantees like credit and papers.

No Relief

The minister of Development, Industry and Foreign Trade, Miguel Jorge, said that the appreciation of the dollar against the Brazilian currency (real) does not necessarily spell relief for Brazilian exporters. "Nobody signs contracts amidst this instability," he said, referring to the strong variations in exchange that have occurred recently.

The minister also stated that the unstable exchange rate causes damage to all of those who operate in the foreign trade area, because it makes price formation difficult. He also said that, in the case of agricultural commodities, the appreciation of the dollar is partly made up for by the reduction in prices of these products on the international market.



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