Re: Brazilian Finance

[Matias Vernengo <vernengo@xxxxxxxx>]

Warren:

Here are some comments about Brazil.

> 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.

The primary surplus refers to domestic debt not foreign, and is for the
most part denominated in reais.  There is no need for international
agencies to lend reais to Brazil.

> THAT MEANS ANOTHER DEFAULT IS NEAR.

Regarding the default I think the jury is still out. Brazil moved this
year from trade deficits to surpluses, hence for the first time since
1994 there are export surpluses to service the debt.  That means that
there is a reduced need for foreign agencies to lend money.  Also, it
means that markets should be less preocupied with the Brazilian ability
to repay.  As a matter of fact, Brazilian country risk (the risk premium
over US Treasuries on Brazilian Sovereign bonds) did fall since Lula's
election.

Also, I should note that a bigger primary surplus is possible becuase
the Brazilian government was able to take the expenses (including
investment) of its public firms from the government balances.  That
means that spending by large public firms (e.g. Petrobras) will not be
counted as deficits, as they were in the past.

This is not to say that all is wonderful and there are no risks in the
Brazilian situation.  In particular,  the maintenance of interest rates
at stratosferic levels does have negative impacts on the ability to grow
faster, and by increasing the financial component of the deficit (which
does not appear in the primary surplus) reduces funds for social
programs.

Best,

Matias

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