Stampede Time


Investors have been pulling their money out of the Brazilian market
at a frantic pace. In one single day in September, the Rio de Janeiro Stock Exchange
(BVRJ) Index dropped 15.98%, while the São Paulo Stock Exchange (Bovespa) Index plunged
By Marta Alvim

The Brazilian presidential election is just around the corner, and incumbent President
Fernando Henrique Cardoso (FHC) leads the polls by an impressive margin over his main
opponent, Luiz Inácio Lula da Silva. However, instead of celebrating his all but
guaranteed victory, FHC has been engaged in a crucial war against an impending contagion.
The bug of the global financial turmoil is hanging over Brazil, and threatens to derail
the continuity of country’s economic stability.

Since the Asian market fall-out in 1997, the financial crisis has been gradually
spreading all over the planet with overtones of an epidemic. Brazil has not been immune to
the international commotion, which has worsened even further in the wake of Russia’s
recent insolvency. Fearing that the crisis might spread throughout Latin America,
investors started to pull their money out of the Brazilian market at a frantic pace. In
one single day in the beginning of September, the Rio de Janeiro Stock Exchange (BVRJ)
Index dropped 15.98%, while the São Paulo Stock Exchange (Bovespa) Index plunged 15.8%.
It was Bovespa’s worst performance since March 21, 1990, when stocks plummeted 22.26% in
direct response to the Collor plan, which confiscated Brazilians’ savings accounts and
other investments.

The successive plunges have been so staggering that the market value of some blue-chip
companies have declined to nearly one third since October 1997. Power generator
Eletrobrás, whose market value was estimated at $28.1 billion a year ago, was valued at
$8.5 billion on September 3, 1998. Together with Telebrás, Telesp and Petrobrás, the
market value of these four companies have dropped from $110.8 billion to $47.7 billion
within the past year.

Moreover, Brazil’s international reserves have plunged below $50 million, from the $70
million registered in the beginning of August. At the peak of the current crisis, the
capital flight amounted to $1 billion per day, forcing the government to raise interest
rates to a monumental height of 49.75%/year in an effort to stop the hemorrhage. Similar
measure had been adopted by Cardoso’s economic team following the Asian crisis, when
interest rates were raised to 43.3% in November 1997.

However, the market only started to rebound after rumors that the International
Monetary Fund (IMF), together with other international lending agencies and the G7 members
(the world’s major industrial nations), might offer a special line of credit to Latin
America. The concession of such a line of credit would not only supplement the countries’
reserves, but would also send a message to investors: that a potential speculative attack
against Latin American currencies would be futile and ill-fated.

The reasons behind the sudden spotlight on Brazil are a matter of controversy among
economists and financial analysts. The belief amidst the optimistic wing is that the
uproar stems mainly by unfounded fears based upon uninformed accounts about the country’s
finances. According to these analysts, speculation against a country’s currency is often
based on a lack of confidence of its own investors in its economy, and the confusion of
local investors has been far more crucial than the supposed lack of confidence of foreign

To support the viewpoint that foreign investors can differentiate Brazil from Russia or
Thailand, the optimistic wing points to statistics which show that after the Asian crisis
direct investments in the economy increased by 24% compared to 1996. Moreover, executives
of several multinational companies operating in Brazil maintain that their corporate
strategies are based on long-term projections, and are, therefore, detached from the
volatile stock market performance.

Contrary to this favorable approach, there are those who believe that the current
scenario is rather serious, but not without remedy; there are others still who advocate a
currency devaluation as the only way out of the crisis. Conflicting opinions
notwithstanding, Brazilian and foreign analysts unanimously agree that the future of the
global economy, including that of the United States, is largely dependent on the future of
the Brazilian economy.

While the Russian disaster may have been particularly distressing to Germany, which has
a considerable amount of investments in that country, its effect on the American economy
will be insignificant, inasmuch as Russia is responsible for only 1% of the United States’
exports. Conversely, 18% of American exports are consumed by Latin America. By the
beginning of the next century, Latin American nations are expected to be the major
consumers of American goods, importing more than the entire European continent. If the
Brazilian economy collapses and succumbs to recession, the impact on all other Latin
American countries will be inevitable. Ultimately, a slowdown in the growth of the
American economy would ensue.

Not surprisingly, President Clinton has been trying to sensitize the industrialized
nations in an effort to rescue the emerging markets from the global financial imbroglio.
In a public speech delivered early in September, Clinton was pragmatic and
straightforward, making clear that his plea for financial help to the emerging nations,
especially to Brazil, was all about business, not solidarity and humanitarianism.

He should know. Never before have Americans invested so much money in Brazil.
Currently, the country is Latin America’s number one recipient of American investments;
worldwide, it is the fifth preferred investment destination for American companies,
surpassing Japan, France and even Mexico. According to the US Department of Commerce, the
direct investments of American enterprises in the Brazilian economy total $36 billion, in
addition to the $27 billion invested by American banks.

As an example, Coca-Cola has invested $350 million in marketing and $220 million in
infrastructure this year alone. Brazil is Coca-Cola’s third largest market, losing only to
the United States and Mexico. Company sales in the country amount to 5.2 billion liters of
soda per year, against 8.3 billion liters in Mexico, and 24 billion liters in the US.

Another major American investor, copier manufacturer Xerox, invests approximately $150
million per year in Brazil, which is the company’s third largest operation worldwide. In
1997, the revenues of the Brazilian subsidiary totaled $1.7 billion, against $5 billion in
Japan and $7 billion in the United States ( Xerox’s second and first largest markets

In the meantime, the Inter-American Development Bank has already approved a $1.1
billion loan to Brazil—the largest loan ever issued by the bank—but the
negotiations between the Brazilian government and the international financial institutions
remain evasive. Although top American executives have good reasons to believe that an
informal rescue deal has already been struck with the IMF, they doubt that it will be
announced before the October 4 presidential election. To do so would be an admission of
defeat for President Cardoso. Furthermore, the loan approval by the IMF will be contingent
on spending cuts and unpopular fiscal measures to curb the budget deficit. The disclosure
of such measures could ruin FHC’s chances of winning the race in the first-round

The government’s inability to control the public deficit has already scratched
Cardoso’s credibility. Time and again he has vowed austerity and announced federal
expenditure cuts, which have never materialized. The sharp rise in interest rates may be
effective in preventing further capital flights, but its compounded effect will increase
the cost of government debt by approximately $10 billion within the short space of three

Clearly, the world’s governments are becoming increasingly more vulnerable to the
excessive mobility of globalized capital. Unless Brazil strengthens its savings by means
of a thorough fiscal adjustment, the country will remain exposed to persisting speculative
attacks and, therefore, to a potential national catastrophe.

Marta Alvim is a Brazilian journalist, freelance translator and
interpreter. You can reach her at


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