[OPE-L:5682] Re: Commodity Money

Claus Germer (cmgermer@SOCIAIS.UFPR.BR)
Wed, 5 Nov 1997 11:36:56 -0200

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Alejandro wrote:

> 3. A third point, defenitely not connected with your post. Here the
> newspapers say that the "Real" has been under pressure given the
> events in Hong Kong and other stock markets. Have you some
> information or thoughts about this?
> BTW, does someone have thoughts about the current world stock market
> crisis?

This is easier to answer than the previous questions, although there are
many aspects that have to be taken into account. At the same time my
vocabulary in English is not enough to make a good account of the events,
but I will try:

What I can say is broadly following: The "Real" has in fact been under
strong pressure and will continue to be so, because there are structural
causes for it, deriving from the nature of the stabilization program. The
'real' - the new monetary standard introduced in july 1994 - has been
reduced to an inflation rate of 5 0.000000e+00xpected for this year. This has been
accomplished by a combination of dramatic liberalization of imports, which
prevents domestic rise of prices, and extremely high interest rates, in
order to keep high levels of foreign reserves. But the result has been that
the 'real' is overvalued, and consequently imports got cheaper and exports
uncompetitive, causing an increasing deficit in the trade balance (from a
surplus of around US$ 12-15 billion until 94 to an expected deficit of 9 bi
this year).

Considering that the return to foreign investment is dependent on the
existence of reserves in foreing currency in order to be converted, as well
as a guarantee to the stability of the exchange rate, and considering
further that reserves come from surplus in trade balance and foreign
investment, the increasing trade deficit reduces confidence in the hability
of the Brazilian government to sustain the exchange rate. Considering
further that the 'real' is already overvalued, there are reasons enough for
foreign investor to be afraid of a sudden devaluation of the 'real', which
would cause bad losses to foreign investors. Before last week's crash,
there was a feeling that the exchange rate would be prevented from a sudden
devaluation due to two circumstances: the presidential election next year,
where the present president intends to be reelected, which means that he
would not destroy the basis of his present popularity - the price stability
-, and the second is the privatization of the electricity and telephone
systems, which will hopefully bring around US$ 100 bi, mainly from foreign

All sumed up, when the crash in the Hong Kong stock market began, there was
already a feeling that the 'real' could suffer a speculative attack, which
then happened. Which means that the fall in H.Kong caused the need for
investors to draw investments from other stock markets to back them up in
H.K., as well as caused a doubt about the hability of Brazilian government
to maintain the exchange rate. So, many investors felt it to be safer to
withdraw before suffering losses. The Brazilian stock markets suffered the
larger decrease in percentual terms, the interest rate has been doubled and
the Brazilian government spoke strongly for the maintenance of the current
policy. The Central Bank sold around US$ 6 bi in one single day, according
to official statement. As a result this means that the confidence in the
stability of the real is now lower that it was previously and nobody knows
precisely what is going to happen the next weeks or months.

I think this would be a broad account of the events and perspectives in
Brazil. There is certainly much more to say, and I may have missed
important elements of the events.