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Brazil Hopeful Markets to Stabilize With New Credit Line - 2002-08-28

The Brazilian government hopes a pledge by major banks in New York this week to maintain their credit lines to Brazil will help stabilize financial markets nervous over the country's economic future. But market confidence may be slow to return.

Brazil's top economic officials got the support they were seeking this week, when major U.S. and European banks promised to maintain their lending to Brazil at current levels.

The pledge was made in New York Monday, following a meeting between representatives of 16 banks and Brazil's finance minister and central bank chief. The commitment by the banks is the latest effort to stave off a financial meltdown of South America's largest economy. It follows the August 7 announcement of a $30 billion loan to Brazil from the International Monetary Fund, its largest ever.

But despite the size of the IMF loan, financial markets remained nervous especially over Brazil's ability to meet its debt obligations. Brazil has a debt of $250 billion, with up to $10 billion coming due by the end of this year. Yet economic and political uncertainty have hampered efforts to renegotiate and roll-over the country's medium and long-term loans. At the same time, market jitters have weakend Brazil's currency, the "real", which has lost one-fourth of its value against the dollar so far this year. This has made financing more expensive for Brazil.

Brazilian economist Paulo Levy says concerns over Brazil's debt are misplaced, adding that faulty perceptions are at the root of the problem.

"It seems that the market is being driven at the moment by a kind of perverse psychology in which, you know, artificial difficulties feed on themselves and create this kind of fear of lending to Brazil and leads financial institutions to reduce their exposure on Brazil," he said. "Obviously no country, or no firm for that matter, can be expected to meet all its obligations at a certain moment on its stock of debt. Brazil has been paying interest regularly, and has never delayed on its payments in recent years, so there should'nt be any reason for concern about an interruption of payments."

Yet shaking these perceptions may be difficult. While pledging to maintain their credit lines to Brazil, the 16 international banks pointedly did not say they will increase them to levels reached early this year. Since March, there has been a 20 percent decline in the money international banks have made available to Brazilian companies.

Brazilian Central Bank head Arminio Fraga says it will probably take several quarters before the flow of credits to Brazil returns to normal. Mr. Fraga told reporters in New York Tuesday that the situation will probably continue to be unsettled until after the presidential election in October.

Economist Levy, of Applied Economic Research, agrees. He says the strength of two leftist opposition candidates continues to create anxiety, despite the implicit pledges the two men made last week to honor the terms of the IMF accord.

"Obviously, the fact that you have two opposition candidates with some form of radical discourse with respect to economic policies brings some fears to international investors," he said. "But since last week when the President met with each candidate, and each candidate committed themselves to maintaining a tough fiscal stance, respecting existing contracts, etc there should be relief of tensions on that front, [but] that's not what we observe. On the other hand, the loan from the IMF was important to prevent the situation from deteriorating further. My perception is that we'll still observe some instability until the elections."

The first round of the presidential election is on October 6. If none of the candidates wins an absolute majority, a runoff will be held on October 27 between the two top vote getters.

For now, polls show two left-wing candidates, Luiz Inacio Lula da Silva and Ciro Gomes, are in first and second place. However, the latest surveys show the government party's candidate, Jose Serra, making some significant gains against Mr. Gomes.

Mr. Serra is the market's favorite candidate, because he has promised to continue the government's economic stabilization policies. His rise in the polls, along with the banks' commitment in New York, have already had some impact on market perceptions. But it appears it will take some time before full confidence in Brazil economic future is restored.