Brazil’s Currency Takes Another Plunge Amid Flight of Capital

Brazil’s battered currency suffered another devastating plunge Thursday as markets shrugged off a key victory for the country’s tough austerity plan amid a worsening dollar drought.

The real tumbled 7.6% to close at 1.72 to the dollar as capital flight threatened to drain the country’s limited supply of dollars. The real has dived 30% since last week.

The main Brazilian stock index slid 4.6% to 7,321, after rocketing in recent days. That helped pull Argentina’s stock market down 6.2% and Mexico’s down 1.1%.

The Brazilian government tried to control the damage, saying it would meet foreign debt payments and pointing to signs of investor confidence.

“The Finance Ministry comes to the public to reiterate that the country will honor all of its international obligations,” the ministry announced. Most of the country’s 52 billion reals (about $30 billion) in external debt is denominated in dollars.

President Fernando Henrique Cardoso joined in the damage control.

“At the same time there have been some understandable concerns in relation to changes in foreign exchange rules, I’ve felt . . . very strong signs of confidence in the country,” Cardoso said. He hailed the announcement of a $2-billion investment by Sprint Corp. as proof of investor appetite.

The foreign exchange market opened at a fever pitch Thursday morning as persistent capital flight and rumors that other emerging markets could succumb to financial crisis sent the currency into a tailspin.

“Things could get very ugly,” a trader at Unibanco in Sao Paulo said. “The currency is just going to get worse, and there’s no telling where this will end or when, if at all, the Central Bank will intervene.”

The Central Bank reiterated it would not intervene to stop the sharp fluctuations in the real and was prepared to leave its value up to the market. “There is no intention of intervening, and I am unaware of any intention in that respect,” said Altamir Lopes, the head of its economics department.

Traders said the real came under intense pressure because without Central Bank interventions, companies desperate to move their savings into dollars had to rely on the market’s limited supply of the U.S. currency.

With daily dollar outflows topping $300 million since the real was permitted to float freely, traders said dollar inventories had almost run dry.

“There are no more dollar stocks in the market,” said a trader with an international bank who asked not to be identified. “There is also uncertainty in the market about when the Central Bank would come in and supply dollars.”

The lower house of the National Congress approved a bill that would make retired civil servants pay pension contributions, raising more than $2 billion a year toward cutting Brazil’s bloated public sector deficit, 8% of the gross domestic product.

The approval of the measure was regarded as an essential victory for Cardoso’s government in its battle to win back the trust of global investors and show that the world’s ninth-biggest economy has the political muscle to make an often unruly Congress back its fiscal reforms.

It was also a key part of the 28 billion reals (about $16 billion at Thursday’s exchange rate) in budget savings Brazil agreed to in return for a $41.5-billion bailout led by the International Monetary Fund late last year.

Congress President Sen. Antonio Carlos Magalhaes said the pensions legislation would be put to a ballot in the Senate on Tuesday, after which it could go into effect.

“The political momentum of the Cardoso administration remains intact,” wrote investment house Salomon Smith Barney in a report.

But markets weren’t cheering.

Investors demanded higher yields on Brazilian debt: The Brazilian central bank on Thursday issued 300 million reals in 27-month dollar-linked notes at an average yield of 18.99%, 1.91 percentage points above the 17.08% yield on similar notes sold last week.

“I’m very afraid it [Brazil’s turmoil] will claim other victims in Latin America,” Barton Biggs, investment strategist at Morgan Stanley Dean Witter, warned. “The most obvious one is Argentina.”