Prices are Clearing the Markets

Oct 1, 2001

High foreign indebtedness and a large current account deficit combined with a marked increase in risk aversion in the international financial markets have pummeled the Brazil's currency. The country faces harsher conditions in which to roll over its debt, with higher risk premiums and shorter maturities. Eventually the exchange rate will depreciate to a level such that the current account will be in equilibrium and the existing supply of external finance will match Brazil's debt rollover needs.

The economic outlook for the whole world has been deteriorating since the beginning of the year, especially so after the terrorist attacks at the World Trade Center and the Pentagon. Nevertheless, very few countries, if any, have been as hard hit as Brazil. Most analysts would agree that this is due to a combination of self-inflicted injuries and a large dose of bad luck. When 2001 started, hopes were high that economic growth would resume. After all, Brazil had done a lot. Hyperinflation was dead since the start of the Real Plan in 1994, Brazil's fiscal position had improved remarkably since the end of 1998. Privatization had been very successful in many sectors including mining, steel and telecoms (although it had stalled in a few others, most noticeably energy generation). And a new and very successful inflation targeting regime had replaced the quasi-fixed exchange rate regime. Sustained economic growth,...

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