NEW YORK/SAO PAULO: Brazil's latest, $60 billion currency intervention is just a bailout by another name. The central bank's plan to prop up the real looks designed to paper over flawed government policy and corporate blunders.
Depreciation has created import inflation - hitting Brazil's voracious middle-class consumers, something that must be worrying President Dilma Rousseff. Meantime, companies committed the cardinal sin of borrowing in dollars. This won't end well.
For the moment, Brazil's central bank has helped halt the slide in the real - which had fallen more than 15 percent this year against the dollar to its weakest level in almost five years. Over the longer term, however, Governor Alexandre Tombini is fighting a losing battle.
As bond yields rise in the United States, money is likely to continue to drain out of emerging markets like India and Brazil, where liquidity is less than optimal. Short-sighted decision-making in Brasilia and in the nation's boardrooms can only serve to make this a more painful reality.
Much of Brazil's 21st-century growth strategy has relied on encouraging a national shopping spree. That partly explains the currency intervention. A sliding real effectively imports inflation, which is already running close to 6.5 percent, the top end of the central bank's target range. This threatens to dampen the largely credit-funded appetite of consumers for imported appliances, electronics and other goods - further depressing already tepid growth.
But it is also clear that many Brazilian companies failed to heed the primary lesson of the 1998 Asian financial crisis. Since 2008, foreign-denominated corporate debt has almost doubled to $173 billion, according to central bank data. Unless that borrowed money was used to acquire assets generating earnings in the same foreign currency, the sliding real makes these loans more expensive to pay off. Telecoms company Grupo Oi , for example, slashed its dividend on Aug. 14 after reporting an 871 million reais ($367 million) currency-related loss in the second quarter.
It is, of course, part of any central bank's remit to help ease immediate liquidity problems for Brazilian companies and consumers and thereby assist economic growth. But monetary policy can't fully protect businesses - or citizens - swayed by misguided government policy from the consequences of their folly.
CONTEXT NEWS
Brazil's central bank announced a currency-intervention program on Aug. 22 that will provide $60 billion worth of cash and insurance to the foreign-exchange market by year-end, a move aimed at bolstering the country's currency, the real, as it slips to near five-year lows against the dollar.
The bank said in a statement it will sell, on Mondays through Thursdays, $500 million worth of currency swaps, derivative contracts designed to provide investors with insurance against a weaker real. On Fridays, it will offer $1 billion on the spot market through repurchase agreements.
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