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Last Updated: Monday, 26 May, 2003, 22:19 GMT 23:19 UK
Brazil slumps on debt action
Brazilian bank notes
Brazil's financial markets have slumped on news that the Central Bank is trying to reduce the amount of domestic debt it issues linked to the dollar.

The move is intended to help stabilise Brazil's mountainous debt pile.

But the move surprised traders, some of whom feared it was an indirect way of interfering with the market and putting a brake on the country's local currency.

"From the market's perspective, this is a way to intervene in the market and set a ceiling for the real," said Alexandre Vasarhelyi, head of foreign exchange at ING Bank in Sao Paulo.

The currency market reacted immediately, reversing earlier gains. The real fell 3.7%, down to 3.03 per dollar.

Taking action

The Central Bank said it wanted to cut its dollar-linked debt despite the fact that sales of dollar-indexed debt has previously helped relieve pressure on the local currency.

The markets' reading was that it (Central Bank) is saying it could indirectly act on the exchange rate
Alvaro Baneira, Agora Senior brokerage

In a surprise move, the Bank said it would no longer set limits on the amount of maturing debt it will try to roll over into the future - meaning it can begin buying back some of its previous debt linked to the dollar.

Brazil, the largest economy in Latin America, has a public debt pile of about $250bn (152bn) - equal to about 55% of gross domestic product.

More than a third of the debt is linked to the free-floating exchange rate, meaning that every time Brazil's currency weakens against the dollar, its debt burden swells further.

Winners and losers

Some investors welcomed the Bank's attempts to keep the debt burden stable.

But some traders pointed to the local currency's recent rally and suggested the Bank was trying to pull it back.

"The markets' reading was that it (Central Bank) is saying it could indirectly act on the exchange rate....so that stressed out the currency and interest rates, and stocks fell," said Alvaro Baneira, chief economist at Agora Senior brokerage.

Companies with debts in dollars fell hardest, with Electropaulo down 8.5% while the energy distributor Cesp dropped 6.5%.

But companies expected to benefit included exporter Companhia Vale do Rio Doce, up 2%, and the biggest eucalyptus pulp maker in the world, Aracruz Celulose, which gained 3.3%.




SEE ALSO:
Brazil split over sky-high rates
22 May 03  |  Business
Lula pushes Brazil reforms
01 May 03  |  Business
US praise for Brazil's reforms
24 Apr 03  |  Business
Brazil raises minimum wage
01 Apr 03  |  Business
Brazil secures World Bank loan
29 Mar 03  |  Business


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