LONDON (CNNfn) - The growing economic crisis in Brazil took a turn for the worse Wednesday when Gustavo Franco, president of the central bank, announced his surprise resignation, sending the Brazilian currency down 8 percent against the dollar.
Franco, seen as a principal architect of Brazil's economic recovery over the last four years, is to be succeeded by the bank's director of monetary policy, Francisco Lopes.
The bank now will pursue a more flexible policy regarding currency and interest rates, Franco said, effectively devaluing the Brazilian real, valued currently at about 1.31 against the dollar. That's near the ceiling of the central bank's new range of 1.20 to 1.32.
The resignation and the new policy "compounds the fiscal problems for Brazil. Interest rates will rise. It's the same story as Mexico back in 1995," said Miranda Xafa, a currency strategist for Salomon Smith Barney.
"The real will float from here and definitely go lower," she said. "Franco was the one who put his foot down against the floating currency."
But Jose Barrionuevo, director of global market strategy for Lehman Brothers, told CNNfn's "Business Day" Lopes "is just as forceful as Mr. Franco on interest rate management. And that means (this) is a political blow. Clearly that('s) a negative, and the concern is going to be are they going to make progress on the fiscal side."
Franco, a staunch defender of the country's controversial and austere stabilization policy, will take up a post as aide to Brazil's president, Fernando Henrique Cardoso.
The growing crisis in Brazil has undermined stocks around the globe. In Spain, stocks of companies that generate a significant proportion of their earnings in Latin America came under the hammer. The IBEX index tumbled 5 percent, led by bank shares.
Bankers speculated the news could harm prospects for Brazil's fragile economy. "I think it is going to add to the short-term political and economic uncertainty," said Neil Dougall, chief Latin American economist at Dresdner Kleinwort Benson in London. He added, however, "Francisco Lopes is respected by markets. He is widely known, so that is helpful to insure continuity."
"Gustavo Franco had a good relationship with international banks and this change is very traumatic. Everything now is going to be related to Fernando Henrique (Cardoso)'s stance and that of Congress," said Adauto Lima, Lloyd's bank economist in Sao Paulo.
Franco became Central Bank president in August 1997. He was previously director of international affairs at the bank.
-- from staff and wire reports