A Bleak Week for Dow, a Dark Day for Brazil

The economic clouds over Latin America darkened further Friday amid a headlong flight of foreign capital from Brazil and reports--strenuously denied by the government--of imminent interest rate hikes and budget cuts.

Reports of such steps, which would further dampen the region’s biggest economy and reelection prospects of free-market President Fernando Henrique Cardoso, sent Brazilian stocks plunging.

Higher interest also sent chills through Mexico, where several banks said they were suspending all new consumer and mortgage loans until financial markets settle down.

Mexico’s peso hit another all-time low, 10.23 against the dollar, and stocks fell 1.84%. Colombia’s main stock index fell 4.5%, and Argentina’s was down 3.4%.

Brazil’s main stock index recovered partially from a 13.9% nose dive in a bout of panic selling one hour before close. It closed off 6.1%. Some market analysts said the federally owned National Development Bank helped the market recover by buying shares at the end of the trading session.

The mini-crash came amid increasing pessimism about Brazil’s economic outlook a day after Moody’s Investor Service lowered its rating of Brazilian sovereign debt. The country is groaning under an increasing debt load exacerbated by budget and trade deficits. The downgrade significantly boosts the cost of servicing that debt.

Speculation continued to swirl that Brazil might have to devalue its currency, a notion that was vigorously denied by Finance Minister Pedro Malan, who was attending a summit meeting of Latin American finance officials convened by the International Monetary Fund in Washington.

“Let me use this opportunity once again to say what we’ve been saying for years: There will be no change in exchange policy,” Malan said.

IMF Managing Director Michel Camdessus said Latin America was “on the right track” toward weathering the global turmoil.

But a consensus is developing that Brazil must at least raise interest rates and cut its budget if it is to restore confidence. As things stand now, Brazil is sinking deeper in an “immense emerging-markets crisis” from which there is no near-term escape, said economist Luis Fernando Lopes of Banco Patrimonio in Sao Paulo.

President Cardoso is believed to want to delay any such action until after the Oct. 4 presidential election. But analysts do not think the country can wait that long.

Since July 31, Brazil has spent $16 billion in foreign reserves--now hemorrhaging at the rate of $1.5 billion a day--to bolster its currency, the real, said Marcelo Audi, Brazilian equity strategist at Merrill Lynch in Sao Paulo.

“A hike in interest rates is needed, and there is increasing expectations of this. And it will have to come with fiscal measures to be credible,” Audi said.

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Brazil’s stocks were whipsawed by rumors that the Cardoso Cabinet would meet this weekend to boost interest rates and cut the budget. But Finance Ministry officials on Friday categorically denied there was any such meeting or package planned.

Citing mounting short-term debt and the likelihood of an interest rate hike, J.P. Morgan said last week that Brazil’s economy would contract 2% in 1998. Merrill Lynch’s Audi said the economy would grow slightly at 0.4% off of projected 1.2% growth this year.

“The problem in the stock market today is that investors are anticipating an emergency landing, so to speak,” Banco Patrimonio’s Lopes said. “We are not expecting this crisis to diminish in the near future.”

In Mexico, interest rates that hovered around 20% for most of the year have shot up close to 40% in recent days as the Central Bank squeezed monetary policy to fight inflation fears sparked by the peso’s fall.

Bankers noted that few customers are willing to take out new loans with interest charges so high. The head of the nation’s banking association, Carlos Gomez y Gomez, last week cautioned consumers not to take on new debt at rates that they might not be able to repay.

Such bad loans were one of the main causes of the country’s mid-1990s banking crisis, which required a $56-billion bailout.

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Staff writer James F. Smith in Mexico City and researcher Paula Gobbi in Rio de Janeiro contributed to this report.

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Action and Reaction

* Alan Greenspan says Fed is prepared to cut interest rates if necessary. A1

* Russia’s Viktor Chernomyrdin offers bold plan to pay overdue wages. A1

* A top U.S. fund manager has been among hardest hit in market plunge. D3