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Brazil's Currency Drops Against Dollar - 2002-08-12

The value of Brazil's currency has dropped against the dollar despite a massive new loan from the International Monetary Fund. Market uncertainty continues over Brazil's economic future.

The Brazilian "real" fell against the U.S. dollar Monday on financial markets, losing the appreciation it had gained late last week following the announcement of a $30 billion loan for Brazil from the IMF.

The huge loan, the largest by the IMF, is designed to reverse a crisis of confidence in Brazil and ease investor fears that a new government will default on $250 billion in public debt.

But analysts say the continuing decline of the currency is a sign that investors remain nervous over Brazil's future, as presidential elections approach in October.

The latest public opinion poll, released Sunday, shows the government candidate, Jose Serra, is still a distant third. Investors consider Mr. Serra the candidate most likely to pursue the anti-inflation and austerity policies of the outgoing administration of President Fernando Henrique Cardoso.

Instead, two left wing candidates continue to lead the polls, Luiz Inacio "Lula" da Silva of the Workers Party and former governor Ciro Gomes of a Workers Front coalition. Even though the two candidates have endorsed the terms of the IMF loan, they did so reluctantly and with much criticism of the government for having to seek a new IMF bailout.

Under the IMF agreement, 80 percent of the loan, or $24 billion, will be disbursed next year only if the new government meets certain budgetary and inflationary targets.

Brazilian Finance Minister Pedro Malan told reporters Monday the government is not planning to take any special measures to stop the slide of the Brazilian currency. He went on to express confidence that with the IMF loan, the current problems will be overcome.

"There are no additional measures to take," he said. "We're working now to gather domestic support for the loan, which I have no doubt will come when everyone realizes this is an agreement that is good for the country. First, because it ensures a peaceful democratic transition, and secondly because it puts $24 billion at the disposal of the new administration. Already, the statements of the candidates are moving in the right direction and I believe as this process is consolidated and perceptions begin to firm up, we will be able to overcome the current difficulties."

The Brazilian currency is trading at around 3.10 "reais" to one dollar, far above its 2.30 rate of early in the year. At one point in July, speculation and investor uncertainty caused the "real" to soar to 3.60 against the dollar, a record high for the currency.

Brazilian economist Paulo Levy says while the IMF loan should help stabilize the currency, its value is unlikely to appreciate very much. "It was understood by most analysts that the [high] levels that we had obtained were clearly not reasonable, not consistent with the fundamentals of the Brazilian economy," he said. "But considering the risks: uncertainty over the electoral outcome and the developments in the international front, it won't appreciate very much. I doubt it will return to the levels where it was, let's say, early in April, around 2.30 "reais" to the dollar."

When the IMF loan was unveiled last week, Brazil's currency strengthened and dropped below three "reais" to the dollar. However, with the renewed slide of the currency, investors appear to be signaling that their fears over Brazil's future have not been eased.