Lucky Brazil to Have Such a Competent Helmsman Amid Global Financial Tempest

Brazil Central Bank chief Henrique MeirellesMuch has been written about the subprime mortgage mess in the US, which has led to the current credit crunch, financial meltdown and recession. This crisis was foreseeable and preventable but little can be remedied now by finger pointing and accusations against the former head of the Federal Reserve, the Secretary of the Treasury, the SEC, Congress, rating agencies, aggressive real estate brokers, dishonest appraisers, sloppy lenders, imaginative packagers and ill informed wishful thinking home buyers. What was done is done.

An unprecedented collective, if not too well coordinated and somewhat delayed, effort on the part of governments in the US, Europe, Asia and Latin America has been instigated to attempt to ameliorate the negative environment. So far other than preventing, or at least delaying, a collapse of the banking system little has been accomplished. Credit markets remain very tight, job losses are mounting, foreclosures rise daily and equity and commodity markets are badly beaten down.

To make a prediction as to how all this will work out and when the bottom in home prices and markets will occur, is pure folly. That the world is in for a period of slower economic growth or even contraction in some areas is obvious. But fear and panic as well as forced selling of assets purchased with borrowed money have no doubt caused much of the losses in the last few weeks.

Until hedge funds, facing margin calls and client redemption requests, unwind their leverage, further losses can be expected. No one knows for sure the amount of Credit Default Swaps to be settled or the value of Mortgage Backed Securities held by banks, insurance companies, pension funds and other institutional investors. Yet to visibly surface are defaults on bonds backed up by credit card and student loan receivables. Tax payers must have deep pockets to complete the bailout or “rescue plan” of beleaguered entities.

Brazil has endured several crises during the more than forty-four years I have resided here. None have been as profound as that facing the First World at present. In 2008, Brazil is better prepared to meet the challenges than many countries. We are self sufficient in energy, for the most part, and have little foreign debt and a positive trade balance.

Inflation is under control. Food is abundant and indebtedness on the part of consumers is not out of hand. The federal budget, while far from balanced, is manageable. Brazilians are accustomed to adversity and sacrifices. People are optimistic by nature. Only 13% of the GNP involves foreign trade. Most banks are basically sound, profitable and conservatively managed.

However, Brazil is not immune to events abroad. The Bovespa index is less than half its peak value in June of this year. Foreign portfolio investors have been selling their Brazilian holdings in order to meet cash requirements caused by falling asset values elsewhere. Interest arbitrage operations are unwinding. These tendencies, plus falling commodity prices and risk aversion relating to “emerging markets,” have contributed to a swift depreciation of the real.

Smaller banks that depend on the market for funding are suffering liquidity problems as local investors fail to renew their time deposits shifting to bigger banks. The Central Bank has encouraged the sale of loan portfolios of these weaker banks to institutions with large branch systems and stable deposits.

Reserve requirements have been reduced to free up cash in the banking system. Solvency is said to not be a problem at this juncture. In one way or another, bank failures will be avoided. Controversial legislation is contemplated that would authorize Banco do Brasil and the federal owned savings bank, Caixa Econômica Federal, to acquire privately owned banks.

Credit has become somewhat restricted and more expensive. Credit from abroad is scarce as foreign banks steer away from perceived risky lending. However Brazil’s foreign reserves are being used to supply credit to worthy firms that export and those with maturing foreign debts. The nation is fortunate to have such an experienced and competent man at the tiller of the Central Bank as Henrique Meirelles.

Much publicity has been given to the losses suffered by three blue chip Brazilian firms that mistakenly bet against the dollar using exchange rate derivatives. Most companies, however, concentrate on their core businesses and have avoided excessive risk taking, as have the banks. The currency devaluation is adversely affecting firms that import components or raw materials such as IT hardware assemblers and fertilizer mixers.

Agricultural producers have received a double whammy with high costs for inputs and lower prices for their crops. It is hoped that by the harvest season in 2009 commodities may have recovered somewhat. Those that export are receiving more reais for their dollars than two months ago so that helps to compensate.

Fewer Brazilians are affected by declining share prices than is the case in the US. But many ordinary people are indirectly owners of shares in Petrobras and Vale ( Cia. Vale do Rio Doce). Second mortgages do not exist here so people have not used their homes as ATMs. But pessimism breeds pessimism and it will be a physiological boost when equity and commodity market bottom out and revert to fundamentals.

The next few weeks will be crucial in determining the depth and tenor of the recession in the US. The prospect of having a new government in place next January will perhaps bring brighter days.  But searching for tidbits of good news is not easy at present.

Richard Edward Hayes first came to Brazil in 1964 as an employee of Chase Manhattan Bank. Since then, Hayes has worked directly and as an advisor for a number of Brazilian and international banks and companies. Currently he is a free lance consultant and can be contacted at


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