Published Saturday, April 21, 2001

Brazil's real plunges on worries over Argentina

SAO PAULO, Brazil -- (AP) -- Growing fears over Argentina's economic situation and political jitters back home sent the Brazilian currency nose diving to its historic intraday low against the U.S. dollar Friday. The real dipped as low as 2.279 to the dollar before recovering slightly to close at 2.253, 2.7 percent above Thursday's close of 2.194.

In a brief statement, Central Bank President Arminio Fraga called the drop ``temporary'' and reiterated that ``the fundamentals of the Brazilian economy remain solid and will allow us to pass through this moment turbulence.''

Traders said panicky investors were dumping reals amid growing fears that neighboring Argentina may not have enough money to pay back bondholders in coming months. Many investors fear such a scenario would punish the whole region.

The same factors were blamed for the Sao Paulo Stock Exchange's 5.09 percent drop.

Adding to the pressure, a growing corruption scandal in the Senate and the specter of a wide ranging parliamentary inquiry into corruption in the executive branch have all but paralyzed much-needed economic and political reforms wending their way through Congress.

On Friday afternoon, the Central Bank tried to stimulate demand for the real with an emergency auction trying to sell 2 billion reals in dollar-linked bonds that provide a built-in hedge against further devaluations.

But even paying interest rates of 13.06 percent, the Central Bank only managed to sell 53 percent of the issue.

In recent months, the Central Bank has used dollar-linked bonds as a way of defending the currency without burning up foreign reserves.

On Thursday, the Central Bank sold 1 billion reals of dollar-linked bonds with interest rates of 8.09 percent, which helped the real recover slightly before Friday's slide.

The falling real also forced the Central Bank to raise the benchmark interest rate by half a percentage point Wednesday to 16.25 in an attempt to contain inflation provoked by the dollar's sharp rise.

The real was created in mid-1994 as part of an economic stabilization plan that put an end to triple-digit inflation. For a few months after it was launched, the real was worth more than the dollar

http://www.miami.com/herald/content/business/internat/digdocs/075238.htm

-- Martin Thompson (mthom1927@aol.com), April 22, 2001