LEXIS®-NEXIS® Academic Universe

LEXIS(R)-NEXIS(R)

Document 49 of 68.

View Related Topics

January 14, 1999, Thursday, Late Edition - Final

SECTION: Section C; Page 8; Column 1; Business/Financial Desk

LENGTH: 1225 words

HEADLINE: THE MARKETS: Market Place;
U.S. financial industry may already have fortified itself against the latest emerging-market crisis.

BYLINE: By Timothy L. O'Brien and Joseph Kahn

BODY:
AS Yogi Berra once observed, it's deja vu all over again.

Brazil, which yesterday devalued its currency, the real, and announced the resignation of its central bank president, Gustavo Franco, is the latest victim of the global financial contagion that first broke out in Southeast Asia about 18 months ago.

And, as was the case when Thailand, Indonesia, South Korea and Russia each broke under the pressure of excessive debt and weakening currencies, there is now ample hand wringing about the United States financial community's exposure to Brazil's travails.

While Brazil's problems are certain to be a negative for American banks, brokerage firms, mutual and hedge funds and other investors in the country, it is still too early to know how extensive the damage will be. Most financial concerns have been reducing their exposure to Brazil since Russia's devaluation sent markets into a tailspin last summer and fall. "The markets tend to overreact to these events, but we won't know until the rest of the story plays out," said Raphael Soifer, an analyst with Brown Brothers Harriman & Company. "But it's never a good thing when currencies are devalued and central bankers resign."

Moreover, Brazil's fate depends on whether the country can achieve its goal of allowing the real to fall no further than another 12 percent against the dollar this year. A similar effort by the Russian Government to gradually devalue its currency, the ruble, failed miserably last August largely because confidence in the ruble and the Russian Government had evaporated. The real fell 8.4 percent against the dollar yesterday, to 75.65 cents.

"The reaction when the devaluation was first announced in Brazil was pretty bad there, but it appears that locals aren't converting reals into dollars because they know if everybody stampedes for the door it will only get worse," said Felipe Garcia Ascencio, an analyst with IDEA Inc., a research firm in New York. "The Latin American and U.S. economies will be hurt because financial activity in the region will be much slower. And everybody is worried that China will be next. So the key thing is to wait and see if this remains a controlled devaluation."

Brazil's ability to control the devaluation will be driven by its willingness to spend precious reserves defending the real. The central bank has kept interest rates artificially high to prop up the real while the country tries to introduce fiscal reforms. In the meantime, the central bank's dollar reserves have plunged to about $31 billion from $75 billion last summer as dollars continue to flee the country. Hundreds of millions of dollars a day have left the country this month as reals are converted into dollars, with about $2 billion withdrawn yesterday alone, according to 4Cast Inc., a New York research firm.

Financial services concerns have been anticipating a devaluation in Brazil for some time, and most say they have ample reserves to absorb any losses there. "Brazil is not a surprise," said Leslie Daniels Webster, head of market risk management at the Chase Manhattan Corporation. "It's like General Franco's dying. It was long rumored."

United States banks had about $16.7 billion of loans and other assets in Brazil at the end of June, the largest amount of any Latin American country, according to the Bank for International Settlements. But most American banks have been cutting back since then.

Citigroup's banking unit, Citibank, had about $3.9 billion of assets in Brazil at the end of September, the same amount held by Chase. BankAmerica had about $3.3 billion at the end of 1998's third quarter, while J. P. Morgan had $2.2 billion, Bankers Trust had $900 million and BankBoston had $860 million. While BankBoston's exposure is the largest relative to its size, all the banks said Brazil alone does not pose a threat to their financial well-being.

Among European banks, Spanish and Portuguese lenders are heavily exposed to Brazil. German banks have also been among the biggest lenders to Brazil and other countries in South America. In a report last November, the Bank for International Settlements noted that German banks were "taking the lead in the supply of fresh funds to Brazil."

Specific data on mutual funds' investments in Brazil are not kept, but open-end equity funds that have at least 10 percent of their assets in Brazil owned $6.3 billion in stock there as of last November, according to Lipper Inc.

Wall Street brokerage and investment banking firms have for years put Brazil near the top of their lists of emerging-market priorities. A surge of investment in the stock market there and the Brazilian Government's promise to sell state-owned property attracted every major United States investment bank.

But many of these firms said that they, like commercial banks, had been steadily reducing their financial exposure to Brazil. Investment bankers and analysts said losses from protracted weakness in Brazil would be small in comparison with the hundreds of millions of dollars many lost when Russia triggered last year's financial panic.

Exposure for most brokerage firms is minimal, analysts said. "Ever since the emerging markets blew up, they have been working hard to reduce their exposure," said Guy Moszkowski, brokerage industry analyst for Salomon Smith Barney.

Merrill Lynch & Company, for example, had substantial exposure to emerging-market debt until the Russian crisis but has since taken steps to reduce that exposure, Mr. Moszkowski said. Likewise for another big emerging-markets player, Lehman Brothers. Industry experts estimate that Lehman has just over $100 million in total exposure in Brazil, substantially reduced from the peak 1998 levels. Citigroup's investment banking unit, Salomon Smith Barney, is also believed to have little direct exposure to Brazil.

The investment bank with the greatest stake in Brazil is Credit Suisse First Boston. The Swiss-American bank six months ago paid $675 million to buy Garantia S.A., a leading Brazilian investment bank.

Credit Suisse First Boston reduced Garantia's inventory of Brazilian Government bonds recently and hedged its exposure to the market, preparing for the possibility of a devaluation, people who work at the bank said. Moreover, Garantia made profits last year and continues to operate profitably this month, Credit Suisse employees said.

Another significant difference between the Russian and Brazilian crises is that hedge funds, among the hottest of the hot money players that dart in and out of markets, have pulled back from Brazil since last summer, thus limiting the sense of panic surrounding Brazil.

Of course, any relative complacency about Brazil -- exemplified, perhaps, by how easily the United States stock market shrugged off Brazil's bad news yesterday -- will be tempered by how viciously and quickly its problems affect other markets.

"The U.S. market's reaction speaks volumes about the underlying resilience of this market," Alan Ruskin, research director at 4Cast, noted in a report yesterday. "It needs a knockout punch to severely dent the U.S. equity market, and Brazil in isolation is not it. But Brazil, Argentina, Hong Kong and China in quick sequence would provide a devastating backdrop that would draw the Fed back into 'rescue the world' mode again, firing on all salvos."

LANGUAGE: ENGLISH

LOAD-DATE: January 14, 1999