Brazil is drawing down a $9.3bn loan from the International Monetary Fund (IMF), the largest ch...
Brazil is drawing down a $9.3bn loan from the International Monetary Fund (IMF), the largest chunk of change ever advanced by the fund to one of its client countries. The money is an instalment on a total loan package of $30bn to help the country make payments on $400bn of debt.
The head of the IMF's mission to Brazil, Jorge Marquez- Ruarte, said on 13 June the $9.3bn was released following a review that found Brazil's compliance with the terms of the loan to be 'brilliant'.
It's true the government of Luiz Inacio Lula da Silva has been a pleasant surprise since he was inaugurated in January.
Lula's election campaign managed to scare the daylights out of the marketplace. The more he talked about economics, the more investors wanted no part of his apparently market-unfriendly vision for Brazil. But what a turnaround. He changed his tune when he took office and began sounding more like a measured and reasonable leader. A great deal of the fright went out of the market. One measure is the price history of the Brazil's famous C bond. In March of 2002, before the campaign got rolling, the bond was selling at approximately 82 cents on the dollar.
By September, when Lula's chances of being elected were apparent, the bond was down to about 52 cents on the dollar. On inauguration day, the bond had recovered to 70 cents. However, on 17 June, it was trading above 92 cents.
Part of the rebound has to be credited to Lula's central bank chief, Henrique Meirelles. While it is too early to judge Meirelles as a policymaker, his presence has contributed to the detoxification of Lula's image in the market.
Back to the $9.3bn of IMF money. Meirelles and finance minister Antonio Palocci signed a letter of intent' with the IMF on 28 May. The letter describes the economic policies Brazil intends to follow to obtain IMF money.
The IMF has warned Brazil it isn't living up to its commitment to reduce inflation below 8% per year. The trouble is the year-over-year inflation as measured in May was in excess of 17%.
This puts Meirelles in a bind. Given the flak Brazil has taken over the past four years, it is hard to imagine a central bank aggressively raising interest rates to fight inflation. Yet examine closely what Meirelles and Palocci wrote to the IMF. Monetary policy is firmly geared towards countering the inflation from last year's depreciation.
This is no accident. It is a clue as to what is in their minds. They blame the surge in inflation and note the year-over-year measure was only 8.45% last October, on the depreciation in the currency.
Now since the currency has stopped depreciating, at least for now, one could argue when the system comes to rest, following the exchange rate shock last year, inflation will be at the agreed 8% level.
And if you believe that, there is nothing for the central bank to do about inflation. As long as the real doesn't take another dive, they are home free.
Take it one step further. Not only will the bank pass on raising rates, it may be setting itself up to lower them.
Lula has shown good economic leadership.
C bonds trading strongly.
Central bank chief highly respected.
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