Brazilian Finance

[Warren Mosler <mosler@xxxxxxxxxxxxxx>]

01/26 13:35
Brazil Raises Surplus Before Interest to 4% to Slow
Debt Growth
By Jeb Blount


Rio de Janeiro, Jan. 26 (Bloomberg) -- Brazil will
raise its budget surplus before interest payments to 4
percent of gross domestic product from 3.75 percent in
an effort to reduce the risk of default on $300
billion of debt.

The target increase in the so-called ``primary
surplus'' was announced at the World Economic Forum in
Davos, Switzerland, by central bank President Henrique
Meirelles, O Globo newspaper reported.

If achieved, the target will give Brazil extra cash to
pay about $50 billion of debt due before July. A
higher surplus is also part of plans to stop the
growth of Brazil's debt.

``They are giving the market what it wants,'' said
Andrew Feltus, who helps manage $100 billion global
investments for Pioneer Investment Management Inc. in
Boston. ``But we're still in a `show-me' stage because
to make debt reduction work, growth has to recover and
local interest rates have to come down.''

Brazil agreed to a 3.75 percent primary surplus as
part of a $30 billion International Monetary Fund
bailout package arranged in August. Last week it
raised the benchmark rate to 25.5 percent from 25, the
fourth increase since October. The increase has raised
the cost of servicing the 46 percent of local debt
that is linked to the benchmark rate.

Officials at Brazil's central bank and ministry didn't
answer phone calls seeking comment.

THE MARKETS WON'T CARRY BRAZIL FOR $300 BILLION (AND
NOW MUCH OF IT GROWING AT A SELF IMPOSED 25.5% RATE)
REGARDLESS OF THE ABOVE GOINGS ON.  IT IS MORE LIKELY
THEY MAKE IMPOSSIBLE MATTERS WORSE.  NOR IS IT LIKELY
THAT ANY INTERNATIONAL AGENCY WILL STEP IN.  THE
AMOUNTS APPEAR FAR TOO HIGH FOR THEM TO ABSORB.

THAT MEANS ANOTHER DEFAULT IS NEAR.  THIS MATTERS IN
TWO WAYS.

FIRST, THE WORLD BANKING SYSTEM IS ILL PREPARED FOR
ANOTHER $300 BILLION IN LOST EQUITY.  SEVERAL
INTERNATIONAL BANKS COULD FACE CAPITAL SHORTFALLS,
IN AN ENVIRONMENT WHERE IT WILL BE DIFFICULT, AT BEST,
TO RAISE NEW CAPITAL.

SECOND, THIS WILL BE YET ANOTHER EXAMPLE OF HOW THERE
IS NO 'PENALTY' FOR DEFAULT, AS THE DEBT IS NON
RECOURSE AND UNSECURED.  LIKE ARGENTINA AND RUSSIA
BEFORE IT, BRAZIL WILL LIKELY BEGIN REAL ECONOMIC
IMPROVEMENT AFTER THE SMOKE CLEARS FROM THE DEFAULT.
THIS COULD TRIGGER DEFAULT OF ALL EMERGING MARKET
'EXTERNAL' DEBT IN SHORT ORDER.

WARREN










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