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Document 115 of 117.

January 14, 1999, Thursday, FINAL EDITION

SECTION: MONEY; Pg. 1B

LENGTH: 1296 words

HEADLINE: Currency devaluation sends Brazil reeling

BYLINE: Elliot Blair Smith; Rich Miller

BODY:
Brazil's brave face to the world crumbled Wednesday, rekindling
fears of runaway global markets from Asia to Russia and injecting
deep pain into Latin America's largest country.

Brazilian central bank chief Gustavo Franco, who had fought a
devaluation of the currency since August with tough talk and high
interest rates, abruptly quit amid a deepening recession and ugly
policy rift between the government and Congress.

Franco was replaced by his aide and well-liked former economics
professor Francisco "Chico" Lopes, who reversed the government's
hard-line monetary policy and devalued Brazil's currency by 8%.
Lopes also widened the real's trading band, bringing the
currency's expected full-year devaluation to about 12%.

That below-the-equator blow sent global stock markets reeling,
though U.S. markets mostly recovered by day's end. The Sao Paulo
stock exchange delayed its opening for 30 minutes and halted trading
12 minutes later as the benchmark index plummeted 10%, triggering
exchange circuit breakers.

The Bovespa index closed 5.1% lower, its bottom since September.
And an estimated $ 2 billion in foreign exchange poured out of
cash-strapped Brazil, double the daily outflow at the height of
the country's crisis last fall.

Meanwhile, central bankers from the USA, Europe and Japan hastily
convened a conference call Wednesday to discuss whether the $ 41.5
billion bailout package the International Monetary Fund had orchestrated
for Brazil in October was sufficient.

In Washington, President Clinton said: "We have a strong interest
in seeing Brazil carry forward with its economic reform plan and
succeed. And we think they will." U.S. officials were informed
late Tuesday of the Brazilian government's decision.

Wall Street strategists give the devaluation strategy only a 50%
chance of succeeding, however.

"The chances of this unraveling are very high," says Standard
& Poor DRI economist Francisco Larios.

Banc One economist Anthony Chan says: "They've moved the line
in the sand backwards. Yet they're saying they are more determined
to defend the new line in the sand. It seems to be an inherent
contradiction."

Devaluation is designed by the Brazilian government of President
Fernando Henrique Cardoso to buy time to bully the country's fractured
Congress into enacting austerity legislation that stalled in December.

A weaker currency via devaluation substitutes for high interest
rates abhorred by Brazilian industry. If the central bank can
trim rates from an average of 33% in December, domestic industry
can worry less about paying its debt and more about borrowing
to resume production.

But the tradeoff is a zero sum game. Now consumer buying power
is dampened. That leaves Brazil's economy standing still amid
the stampede of disappearing investors and its runaway fiscal
debt of $ 64 billion.

Consider the example of Sao Paulo attorney Bill Bolster, 53, married
and the father of four. "I drive an old, beat-up car," Bolster
says. "Last month, I walked into a dealership with the intention
of buying a new car. (But) then I just walked out. I thought better
of it. With times like these, I thought I really should keep my
savings for a rainy day."

The USA is not likely to be an immediate victim of Brazil's woes
-- Brazil is the USA's 11th-largest trading partner -- though
Latin America stands to absorb more pain. "I don't think this
will spread much beyond Argentina and Mexico," says Steven Radelet
of the Harvard Institute for International Development.

Foreign investors in the country's stock and credit markets already
have borne the brunt of their losses, taken their capital and
left. They are unlikely to return anytime soon.

Dozens of large U.S. companies with substantial direct investments
in Brazil will suffer local economic contractions, however. And
U.S. banks are on the hook for about 20% of Brazil's $ 84.6 billion
in short-term debt, two-thirds of which falls due within a year.

Ford temporarily closed its Brazilian factories in December. General
Motors is scheduled to meet with union negotiators today amid
its threat to lay off 1,000 Brazilian workers.

"Everything that is expressed in U.S. dollars becomes more expensive,"
rues GM spokesman Bob Sharp.

Reebok executive Angel Martinez says: "Business hates instability.
It's very hard to plan, especially when you have manufacturing
concerns in Brazil and you depend on a stable economy for long-term
planning."

The latest round in the unfolding crisis began Jan. 4, when former
president Itamar Franco -- governor of the debt-ridden rural state
of Minas Gerais -- announced he would halt his state's payments
to creditors, including $ 108 million in eurobonds owed to foreign
investors. Minas Gerais' next payment of $ 58 million is due Jan.
20.

Franco, who preceded Cardoso as president -- and wants to succeed
him -- criticized the federal government's economic policies and
its leadership as "incompetent." Itamar Franco is no relation
to the departed central bank president Gustavo Franco.

"It was like a small fish provoking a movement in the big ocean.
He appears to have no sensitivity to the globalization effect,"
says Mario Fleck, managing partner at Andersen Consulting in Sao
Paulo.

Governors of three more states quickly supported Franco's debt
moratorium, rocking financial markets and exposing the fault line
that divides Brazil's central government led by Cardoso and the
autonomous states.

But support for Itamar Franco appears to be evaporating. In Sao
Paulo, McKinsey & Co. consultant Bill Jones says: "The silly
revolt of the governors" is in retreat and that Franco now appears
to be "ostracized by his peers."

And on Wednesday, Brazil's Congress approved measures aimed at
raising $ 3 billion in new taxes this year, in a belated effort
to restore confidence.

However, private economists estimate that government austerity
measures fall about $ 4.2 billion short of IMF targets, increasing
the urgency for internal reforms and renewing the prospect for
additional external aid.

With Congress' failure in December to approve higher Social Security
payments by government workers and other major belt-tightening
measures, the gap between Cardoso's promises and IMF targets grows
by an additional $ 1.3 billion a month beginning next week.

"No matter how many nominal changes you make, nothing is going
to be OK until you get the fiscal house in order," says Lehman
Bros.' Jose Barrionuevo.

An IMF crisis team scheduled to visit Brazil in February to supervise
the next disbursement of international aide is expected now to
accelerate that visit.

Devaluation inevitable

Although the timing of Brazil's devaluation was unexpected, it
increasingly was viewed as inevitable.

Moreover, the appointment of Lopes to succeed his former economics
student Gustavo Franco is seen as more symbolic than substantive.
One well-informed official says Lopes long had been promised that
he would succeed Franco in Cardoso's second term and that Franco
welcomed the change. Exhausted after 5 1/2 years in the central
bank cauldron by political sniping and his weekly commute to Brasilia
from his home in Rio de Janeiro, Franco was appointed to a special
advisory role to President Cardoso.

BBA Securities Executive Director Edmar Bacha, a friend of both
men, says: "(Lopes) is more likable than Franco, easier to deal
with than Franco proved to be. That will make life easier within
the government and between the government and Congress. Moreover,
he is as tough, as orthodox and conservative as Franco is."

Contributing: Diana Rojas in Sao Paulo

GRAPHIC: GRAPHIC, Color, Illustration by Web Bryant, USA TODAY; PHOTO, Color, Ruy Baron, Reuters; PHOTO, Color, Ed Ferreira, Agencia Estado; PHOTO, B/W, Sergio Moraes, Reuters; Lopes: 'More likable than Franco.' Franco: Apparently welcomed change. Eye on presidency: Itamar Franco has criticized the Brazilian government's economic policies.

LANGUAGE: ENGLISH

LOAD-DATE: January 14, 1999