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Tuesday, February 2, 1999 Published at 13:22 GMT

Business: The Economy

Soros aide to head Brazil's central bank

The new man arrives for work

Brazil's currency, the real, has rallied to its strongest level in a week after the appointment of the third president of the country's central bank in as many weeks.

Steven Cviic on the latest surprise in Brazil's turbulent economic travails
Francisco Lopes' departure comes after just three weeks in the job following the resignation of his predecessor when the currency crisis began in mid-January.

He is to be replaced by economist Arminio Fraga Neto, a former central bank official who has until recently directed the speculative activities of Soros Fund Management, the powerful investment vehicle of the international billionaire George Soros.

More credible banker?

Chris Palmer talks about Mr Fraga's background
Mr Fraga was international affairs director at the central bank between 1991 and 1992 under former President Collor de Mello, before joining the Soros Fund in 1993.

He has now severed all his links with Mr Soros and "there is no relation between his opinions and those of his former boss," according to Brazil's Finance Minister Pedro Malan. Mr Soros has been advocating some sort of international currency coordination recently.

Mr Malan said that the appointment "in no way represents any change in the direction and orientation of economic policy." He said further changes would be announced at the central bank shortly.

Mr Fraga's appointment was seen by economists as giving Brazil's economic policy more credibility in international financial markets.

"He's a very serious man," said Inter-American Development Bank economist Ricardo Hausmann. "I think if he announces an economic will have a lot of credibility, and I think that we're seeing that right now as we speak in the strengthening of the real."

And a foreign exchange dealer added:

"A guy with practice in the market is going to help a lot more than somebody who just knows theories."

Mr Fraga will only take over when he is confirmed by the Brazilian Senate in hearings which will begin on 22 February following the Carnival holiday.

Until then, the central bank's International Affairs Director Demosthenes Madureira de Pinho Neto would serve as interim head.

Meanwhile the Finance Minister revealed that he had submitted his own resignation, but it had been refused.

"I will remain in the position as long as I have the benefit of the president's confidence," Mr Malan said.

Real on the rebound

The real strengthened on Tuesday to close at 1.75 to the US dollar, its highest level in seven turbulent days. It had plunged to a record low of 2.10 on Friday.

Meanwhile the Brazilian stock market suffered a wave of profit-taking, with the Bovespa index plunging more than 3%.

[ image: Tension remains despite Monday's market rebound]
Tension remains despite Monday's market rebound
The embattled currency has recovered since panic eased about weekend rumours that the government was planning extreme measures such as freezing bank accounts.

Mounting tension over the weekend failed to materialise into the feared run on savings accounts on Monday, providing some relief for the country's bankers.

Traders said a main reason for the real's recovery was the central bank's decision to increase the amount of dollars banks can sell on the domestic market.

Economists had predicted that the bank would raise interest rates to 41% if the currency continued to slide. Rates were raised to 39% on Monday.

IMF talks

The prospect of IMF talks also boosted the real and helped calm markets.

[ image: Stanley Fischer of the IMF; prospect of talks have helped to calm markets]
Stanley Fischer of the IMF; prospect of talks have helped to calm markets
International Monetary Fund (IMF) Deputy Managing Director Stanley Fischer has arrived in Brazil for talks on how to stabilise the world's eighth-largest economy.

Mr Fischer is to join a technical team in talks with government officials over how to rebuild Brazil's credibility after its surprise currency devaluation three weeks ago.

IMF and government officials will try to agree new targets by Wednesday for Brazil's budget, interest rates and foreign exchange rules following the devaluation, which was not foreseen in their original November deal.

If a deal is reached, Brazil will be able to draw a second $9bn instalment from the loan package which would send a signal of renewed international support for the country's economy.

Mr Fischer's presence at the talks adds the political weight that Brazil's government hopes will lead to the speedy release of the second instalment. The IMF has said little since the crisis first erupted.

Soros warning

Adding to concerns were comments by international financier George Soros, who often speculates in currency movements. He urged the IMF to act quickly to release more funds to stabilise Brazil's economic crisis. "This is the moment. I don't think there is a great deal of time, really," said Mr Soros, speaking at the World Economic Forum.

On Monday, central bankers raised official rates another two percentage points to 39%.

There have been fears that the IMF will demand that Brazil raise its interest rates to 70% to further defend its currency.

Avoiding a freefall in the currency along the lines of last August's rouble collapse in Russia is seen of paramount importance in containing Brazil's problems.

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