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Brazil woes crop up again
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January 12, 1999: 6:37 p.m. ET
Bovespa index sinks 7.6 percent; dollars flee; IMF-led reforms in jeopardy
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NEW YORK (CNNfn) - Gasping for air again, Brazil's stocks tumbled Tuesday as the latest bout of political turmoil in the country threatened to derail efforts to stave off economic meltdown.
Reeling from concerns about Brasilia's ability to pay its international obligations, after the country's third-largest state halted debt payments last week, the key Bovespa stock index fell 488 points to 5,916, or 7.6 percent.
Tuesday's market meltdown, whose repercussions rang as far as Wall Street, signals internal pressures in Latin America's largest economy that could turn into a stumbling block on the way to recovery, analysts said.
Late last summer, when a collapse in Russia triggered a worldwide emerging-market shakedown, key industrialized nations - led by the United States - cobbled together a bailout plan for Brazil under the auspices of the International Monetary Fund.
Now, analysts say, President Fernando Henrique Cardoso needs to reaffirm Brazil's commitment to reform and rally up parts of the country less inclined to make the hard choices the IMF plan demands.
Late Tuesday, Cardoso got a vote of confidence from 18 of Brazil's 26 state governors, who urged the country's Congress to pass key reforms quickly.
That circling of the wagons among Cardoso allies came in the wake of last Wednesday's announcement of a debt-payment moratorium by Minas Gerais, Brazil's third-largest state.
Ignoring Cardoso's warnings, state governor Itamar Franco, himself a former president of Brazil, said Minas Gerais would delay by 90 days payments of $13.4 billion due to the federal government.
Since that declaration, which raised concern other states might follow suit, Brazil's Bovespa index has lost 19.3 percent, including Tuesday's slide.
Still in real trouble
Lingering in the background, and raising hairs in Washington, is a continued flight of dollars out of Brazil. Talk is mounting - again - that Brazil may soon be forced to devalue its embattled real.
The country's central bank early Tuesday took a step to head off devaluation, selling U.S. dollars and buying reals. The real last traded at 1.2108 to the dollar.
The currency market intervention came against the backdrop of continued squabbling over who's going to pay for fiscal reforms, sorely needed if Brazil is to get its promised IMF bailout.
"It's a risky situation," said Francis Freisinger, manager of Latin American economics at Merrill Lynch. "The odds are deteriorating, but on balance they are still in favor of keeping the [exchange-rate] regime."
Since last May, Brazil has hemorrhaged its foreign currency reserves from $70 billion to roughly $34 billion today. The dollar flight continued Tuesday - accelerating to a stunning $935 million late in the day, according to reports. Official figures were expected to be released Wednesday morning.
IMF plan was a supposed antidote
Brazil, a top U.S. trading partner, has been sweltering under fits and starts since Russia effectively defaulted on its debt last summer - heaping investor skepticism onto a host of emerging markets.
The trouble now is that would-be rescuers from the IMF already have played their hand, with last November's record three-year, $41-billion loan package to Brazil.
The plan, which a newly re-elected Cardoso put through the Brazilian Senate in December, is now in tough straits as strapped regional governments drag their heels about ponying up for fiscal reform, by cutting what analysts say are bloated bureaucracies.
Concerned about any spillover from the turmoil in Brazil, U.S. Treasury Secretary Robert Rubin said Tuesday he is convinced Cardoso is firmly behind the reform plans.
"Cardoso is absolutely committed to doing what needs to be done, and he has the support of the global community," Rubin said after a meeting with Argentina's President Carlos Menem.
"Politics is obviously the key, but it seems to me there's a lot of reasons to be hopeful that politics will work their way through this, although there are no certainties," he said.
But Cardoso is clearly no longer the one in need of convincing. Now that the global promissory notes have been signed, it is more important to keep internal accord in the country and trim bloated governments to save cash.
Domestic bickering is what is gnawing at the Bovespa, one Latin American analyst said.
"It's pretty much out of the hands of the IMF," said Jorge Mariscal, vice president of the Latin America equity group at Goldman Sachs. 
-- by staff writer Jamey Keaten
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