---------- Forwarded message ---------- Date: Sat, 23 Jan 1999 16:16:34 -0600 (CST) From: Danny Cox <[EMAIL PROTECTED]> Reply-To: [EMAIL PROTECTED] To: [EMAIL PROTECTED] Subject: [bearslist] World Markets Shaken by Brazil Worries From: [EMAIL PROTECTED] (Danny Cox) World Markets Shaken by Brazil Worries New Concerns About Asia Add to Investors' Anxiety By Paul Blustein Washington Post Staff Writer Saturday, January 23, 1999; Page E01 Global financial markets trembled yesterday amid deepening fears that Brazil was losing its battle to keep investors from fleeing the country. Adding to the jitters was renewed speculation that China and Hong Kong might be forced to devalue their currencies. And underscoring worries that markets worldwide are headed for a fresh bout of instability, a top Japanese Finance Ministry official fretted publicly about "a risk of world financial collapse." Hong Kong's main stock index fell 3.1 percent, South Korea's fell 5.4 percent, Germany's fell 3 percent and Britain's lost 2.7 percent as evidence mounted that Brazil's recent turmoil might worsen and double back to Asia, where the global financial crisis started a year and a half ago. The Dow Jones industrial average shed 143.41 points, or 1.5 percent, to finish at 9120.67, although much of that was attributed to Wall Street's disappointment with International Business Machine Corp.'s fourth-quarter earnings. IBM shares plunged $17.25, to $179.75. One bright spot was Argentina, where the stock market gained 1.1 percent following a government announcement late Thursday that the country was strongly considering a novel plan to eliminate its currency, the peso, in favor of the U.S. dollar. But the tremors in Brazil and Asia raised anew the prospect that the global crisis was taking another nasty turn in which currency and stock market sell-offs in one country lead to sell-offs in others. When the currency of a major economy slides 30 percent as Brazil's has over the past week and a half, other countries' currencies often follow suit because otherwise, their exports become uncompetitively priced. Brazilian markets did not take a catastrophic hit yesterday; the main stock index fell 1.8 percent. The currency, the real, recovered from a tumble after the central bank intervened for the first time this week to buy reals. The real ended at 1.71 per dollar, down from 1.70 late Thursday. But other troubling signs emerged, notably the government's failure to sell about one-third of the 10-month bills it was offering at auction yesterday because many investors insisted on receiving a yield higher than the maximum 14 percent. And the fact that markets were losing ground for a second day in a row was particularly disturbing because many analysts and government officials had been expecting a rally following a congressional vote Wednesday night approving the most controversial section of the government's budget-cutting plan. The administration of President Fernando Henrique Cardoso had warned that the vote on the bill to cut civil service pension costs would be seen by investors as a critical test of Brazil's ability to tackle its most serious problem -- its massive budget deficit. So the disappointing market response fueled fresh doubts about the effectiveness of the international effort led by the IMF and the Clinton administration to stabilize Brazil's economy. The IMF and the administration lined up a $41.5 billion loan package for Brazil two months ago. "It took me by surprise, I must tell you," said Arturo Porzecanski, chief economist for the Americas at ING Barings, referring to the declines in Brazilian markets yesterday and the day before. "I slept soundly Wednesday night knowing that Congress had finally passed an important measure that had been defeated four times previously, but market sentiment soured [Thursday and Friday], and the situation is really precarious." The IMF and Treasury declined comment. An IMF staff mission that was scheduled to leave for Brazil as early as this weekend has been delayed, a spokesman said, but a Treasury spokesman said that Edwin Truman, the assistant secretary for international affairs, would go to Brazil early next week. The advice from Washington is almost certain to be that Brazil, having been forced by market pressure last week to drop its policy of maintaining a fixed value for the real, now needs to make clear to investors what principles it will follow in conducting monetary policy to keep inflation in check. A number of analysts, including Porzecanski, said that the markets' poor showing was due in part to fears that Brazil might revert to its old practice of printing money with abandon now that it has abandoned the discipline of the fixed-currency approach. "What has happened is a pretty major change in currency regime in a country that has had experience with hyperinflation and monetary mismanagement in the past," said Desmond Lachman, head of emerging markets research at Salomon Smith Barney in New York. "So they need to come out with a new set of rules of the game." The developments in Brazil revived one of the biggest fears of last year's crisis -- the danger that China and Hong Kong might feel compelled to drop their fixed exchange rates, too, starting another cycle of devaluations in Asia. Chinese officials reiterated this week that they will keep their currency stable because it is in China's interest to do so, and many economists agree. But in a sign of growing market pressures, Hong Kong interest rates headed sharply higher yesterday as the government sought to make it expensive for speculators to borrow and place bets that the Hong Kong dollar will fall. In Argentina, meanwhile, the announcement that the government is thinking of "dollarizing" the economy appeared to have insulated the country -- at least yesterday -- from some of the troubles afflicting its giant neighbor. Argentina already keeps the peso tied to the dollar on a rigid basis under a system known as a currency board. So scrapping the peso and making the dollar the country's currency would involve little sacrifice of monetary sovereignty, and it might increase investor confidence. But even if adopted, the plan would take several years to implement, and would pose some serious political and technical difficulties, economists said. In Tokyo, Eisuke Sakakibara, the vice minister for finance, used extraordinarily blunt language in voicing Japanese frustration over turbulence in financial markets. He denounced what he called "market fundamentalism" -- a reference to the freewheeling capitalism favored by Washington -- and criticized the IMF's approach in rescuing Asian economies. "There is a risk of world financial collapse, and that's why it's important to review the global financial architecture," he said. "The one we have right now is inherently unstable." © Copyright 1999 The Washington Post Company ------------------------------------------------------------------------ To unsubscribe from this mailing list, or to change your subscription to digest, go to the ONElist web site, at http://www.onelist.com and select the User Center link from the menu bar on the left. ------------------------------------------------------------------------ To subscribe to bearslist, send a blank message to [EMAIL PROTECTED]
