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1,800 | <s>[INST] A country that devalues it's currency invariably suffers the wrath of [/INST] international investors, and is forced to engineer massive adjustment programs that result in increased unemployment, rapid inflation and social unrest. </s> |
1,801 | <s>[INST] Not even the International Monetary Fund, once considered [/INST] to be the world's financial doctor, has been able to help devaluing countries. </s> |
1,802 | <s>[INST] With its huge international reserves -- about [/INST] $70 billion -- Brazil still has time to avoid a major crisis. </s> |
1,803 | <s>[INST] The problem is that, in light of [/INST] the Russian debacle, market participants are becoming increasingly impatient and jittery. </s> |
1,804 | <s>[INST] In evaluating Brazil's options it is [/INST] useful to look at its neighbor to the south, Argentina. </s> |
1,805 | <s>[INST] In 1991, after two rounds of hyperinflation, Argentina implemented a new monetary [/INST] system based on a fixed, one-to-one, exchange rate to the U.S. dollar, free capital mobility and strict constraints on central bank behavior. </s> |
1,806 | <s>[INST] Under this "convertibility" system, 100% of Argentina's monetary base [/INST] is backed with foreign exchange, and the central bank is forbidden from granting credit to the government. </s> |
1,807 | <s>[INST] This system has been supplemented with high liquidity requirements on local [/INST] banks, giving stability to the financial system, and an international credit line that can provide liquidity in a crisis. </s> |
1,808 | <s>[INST] In spite of initial international [/INST] skepticism, the convertibility law has served Argentina very well. </s> |
1,809 | <s>[INST] Inflation has disappeared, growth has resumed, [/INST] and unemployment -- although still high -- is declining. </s> |
1,810 | <s>[INST] More impressively, perhaps, interest rates have remained very low; [/INST] indeed at 8% per year the government's cost of borrowing is less than half that of Brazil's. </s> |
1,811 | <s>[INST] In the aftermath of the Mexican crisis [/INST] of December 1994, Argentina's international reserves dipped, generating a liquidity squeeze. </s> |
1,812 | <s>[INST] By staying the course, however, the country [/INST] was able rapidly to regain credibility, attracting, once again, foreign investors. </s> |
1,813 | <s>[INST] The adoption of a common currency for Mercosur, [/INST] based on the Argentine convertibility system, would provide much needed stability to Brazil. </s> |
1,814 | <s>[INST] The most important short-run effect would be a rapid decline [/INST] in Brazilian interest rates from their current 20% per annum, to levels similar to prevailing Argentine rates. </s> |
1,815 | <s>[INST] By reducing the cost of servicing the [/INST] domestic debt, lower interest rates would immediately help lower Brazil's fiscal deficit. </s> |
1,816 | <s>[INST] According to my own computations, these lower interest rate costs would help [/INST] reduce Brazil's public sector imbalance from its current 7% of gross domestic product, to a still high but more manageable 3.2% of GDP. </s> |
1,817 | <s>[INST] For this program to be successful, Brazil would [/INST] have to implement a number of measures rapidly to further reduce the fiscal deficit. </s> |
1,818 | <s>[INST] Some of the required fiscal policies -- such as the administrative reform that would [/INST] allow the government to reduce the size of the bureaucracy -- are already in the pipeline, but have not been implemented due to political reasons. </s> |
1,819 | <s>[INST] It would also be necessary to [/INST] adopt Argentine policies aimed at maintaining a strong banking sector. </s> |
1,820 | <s>[INST] Moreover, it would be necessary to enact deep [/INST] labor market reforms that would reduce labor costs, encourage employment and increase labor market flexibility. </s> |
1,821 | <s>[INST] This would ease the (potential) costs [/INST] of this fixed exchange rate system under certain conditions. </s> |
1,822 | <s>[INST] These reforms are politically difficult to implement -- in spite of valiant efforts by the [/INST] economic team, Argentina still has not done it -- but their approval would help reduce the trade-off between stability and the country's capacity to absorb external shocks. </s> |
1,823 | <s>[INST] Brazil's $70 billion in international reserves are higher than both its [/INST] monetary base, currently at $33 billion, and M1 ($36 billion), making the adoption of a Argentine-style monetary system technically feasible. </s> |
1,824 | <s>[INST] Deciding who would run this new monetary institution would not be easy, and [/INST] one could imagine that, just as in the case of the European Monetary Union, petty politics and nationalistic interest would affect the process. </s> |
1,825 | <s>[INST] In the end, however, a technical criteria should prevail, and [/INST] Pedro Pou, the current governor of Argentina's Central Bank, should get the job for the first term. </s> |
1,826 | <s>[INST] So much so, that according to a recent study by A.T. Kearney's [/INST] Global Business Policy Council, Brazil is second only to the U.S. among countries considered as attractive markets for global corporate investors. </s> |
1,827 | <s>[INST] It would be a tragedy if this [/INST] potential is derailed by a currency crisis and the ensuing macroeconomic chaos. </s> |
1,828 | <s>[INST] It is time for the Brazilian leadership [/INST] to take truly creative and lasting measures to ensure economic stability. </s> |
1,829 | <s>[INST] Although by no means a panacea, adopting President Menem's [/INST] idea of a common currency for Mercosur would go a long way towards achieving that goal. </s> |
1,830 | <s>[INST] --- Mr. Edwards is professor of [/INST] international economics at UCLA's Anderson Graduate School of Management. </s> |
1,831 | <s>[INST] (See related letter: "Letters to the Editor: [/INST] Brazil Should Avoid Rigid Exchange Rate" -- WSJ September 4, 1998) </s> |
1,832 | <s>[INST] ___ Document 389 of 500 Investors Brace After Shudders in Global Stocks --- Financial Virus Spreads Beyond Russia, Others [/INST] Author: By Wall Street Journal staff reporters Michael R. Sesit and Silvia Ascarelli in London, and Sara Webb in New York Publication info: Wall Street Journal , Eastern edition [New York, N.Y] 24 Aug 1998: C1. </s> |
1,833 | <s>[INST] accountid=28034 Abstract: Analysts believe the cabinet [/INST] reshuffle could rattle Western markets further when they open today. </s> |
1,834 | <s>[INST] "It exacerbates the underlying (bad) situation" in Russia, [/INST] says J. Paul Horne, European stock-market economist at Salomon Smith Barney Holdings Inc. in London. </s> |
1,835 | <s>[INST] "Clearly, it shows that (Boris) Yeltsin is [/INST] unreliable, and that, of course, isn't what investors wanted to hear". </s> |
1,836 | <s>[INST] On Friday, the German stock market plunged 5.4%, capping a week [/INST] in which Russia effectively devalued its currency, effectively defaulted on its debt and saw its stock market crash 29%. </s> |
1,837 | <s>[INST] Meanwhile, Spanish stocks plummeted 5.8% on growing fears [/INST] about Latin American currencies and markets, specifically rumors that Venezuela might devalue its bolivar. </s> |
1,838 | <s>[INST] Michael Howell, head global strategist at CrossBorder [/INST] Capital, a London financialconsulting firm, sees the world heading toward recession. </s> |
1,839 | <s>[INST] About 40% of it is already in recession, [/INST] and Friday's carnage wiped about $400 billion of value from world stock markets. </s> |
1,840 | <s>[INST] "With these sort of crises, stock markets can [/INST] keep falling; panics bring them down in 5% to 10% lurches," Mr. Howell says. </s> |
1,841 | <s>[INST] Full text: The financial virus from [/INST] emerging markets is spreading, threatening the health of Western financial markets. </s> |
1,842 | <s>[INST] Yesterday, Russian President Boris Yeltsin dismissed Sergei [/INST] Kiriyenko, his 36-year-old prime minister, and his entire team of reformers. </s> |
1,843 | <s>[INST] In Mr. Kiriyenko's place stepped Viktor [/INST] Chernomyrdin, the Soviet-era apparatchik whom Mr. Yeltsin ousted in March. </s> |
1,844 | <s>[INST] Analysts believe the cabinet reshuffle [/INST] could rattle Western markets further when they open today. </s> |
1,845 | <s>[INST] "It exacerbates the underlying [bad] situation" in Russia, [/INST] says J. Paul Horne, European stock-market economist at Salomon Smith Barney Holdings Inc. in London. </s> |
1,846 | <s>[INST] "Clearly, it shows that Yeltsin is [/INST] unreliable, and that, of course, isn't what investors wanted to hear". </s> |
1,847 | <s>[INST] At midday, the Nikkei 225 stock average was [/INST] down 408.69 points to 14889.51, after falling 93.21 points on Friday to 15298.20. </s> |
1,848 | <s>[INST] The Taiwan market also started the day [/INST] lower, with its blue-chip stock index falling 226.20 to 6987.17 at about midday. </s> |
1,849 | <s>[INST] On Friday, the German stock market plunged 5.4%, capping a week [/INST] in which Russia effectively devalued its currency, effectively defaulted on its debt and saw its stock market crash 29%. </s> |
1,850 | <s>[INST] Meanwhile, Spanish stocks plummeted 5.8% on growing fears [/INST] about Latin American currencies and markets, specifically rumors that Venezuela might devalue its bolivar. </s> |
1,851 | <s>[INST] For months, the contagion was mainly restricted to the world's [/INST] emerging markets, as Asian currencies and stock markets kept falling, one after another, in a vicious downward spiral. </s> |
1,852 | <s>[INST] But now it is beginning to reach into the heart of Europe and the U.S. "We [/INST] are seeing the implications of what people call the Asian flu on major developed markets," says Wolfhard Graetz, chief investment officer at Bank J. Vontobel & Co. in Zurich. </s> |
1,853 | <s>[INST] De facto, the Russians [/INST] declared bankruptcy, at least for short-term debt". </s> |
1,854 | <s>[INST] The degree to which German and Spanish stocks, two of Europe's [/INST] better-performing markets, are suffering from their association with two of the world's basket cases reflects global contagion at its most extreme. </s> |
1,855 | <s>[INST] Its hallmarks include competitive devaluations, collapsing commodity prices, shrinking global liquidity, [/INST] investors' reduced tolerance for risk, and fund managers dumping shares in one market because they fear disaster in another. </s> |
1,856 | <s>[INST] For one thing, the debacles in Russia and Asia are forcing hedge-fund managers [/INST] to sell stocks and low-grade bonds in other markets to make up for loans they took out to invest in Russian and Asian markets. </s> |
1,857 | <s>[INST] Investors also are beginning to heed the [/INST] warnings of economists, who say the world is heading for a global slowdown. </s> |
1,858 | <s>[INST] Taken together, those factors [/INST] spell trouble for major Western stock markets. </s> |
1,859 | <s>[INST] "If more bad news accumulates, you could see stock markets [/INST] fall another 5% to 15%," says Paul Burik, chief investment officer at Commerz International Capital Management in Frankfurt. </s> |
1,860 | <s>[INST] Major markets are vulnerable because the current turmoil [/INST] is occurring "against a backdrop of valuations which, by most people's measures, was stretched". </s> |
1,861 | <s>[INST] Michael Howell, head global strategist at CrossBorder [/INST] Capital, a London financialconsulting firm, sees the world heading toward recession. </s> |
1,862 | <s>[INST] About 40% of it is already in recession, [/INST] and Friday's carnage wiped about $400 billion of value from world stock markets. </s> |
1,863 | <s>[INST] "With these sort of crises, stock markets can [/INST] keep falling; panics bring them down in 5% to 10% lurches," Mr. Howell says. </s> |
1,864 | <s>[INST] Still, it may take a while for [/INST] investors to fully grasp the impact of the disruptions rattling world markets. </s> |
1,865 | <s>[INST] Many money managers also [/INST] believe stock markets may have a floor. </s> |
1,866 | <s>[INST] "As long as we have very, very low bond yields, [/INST] the fallout will be limited, because there are no alternative investment possibilities than stocks," Vontobel's Mr. Graetz says. </s> |
1,867 | <s>[INST] "So I expect a major correction of maybe [/INST] 20% from markets' peaks, but I don't expect an extended bear market, not yet". </s> |
1,868 | <s>[INST] Although he concedes it will be some time until emerging [/INST] markets bounce back, Mr. Graetz says "for long-term value investors, value is popping up in these markets". </s> |
1,869 | <s>[INST] Stock markets in Britain, France, Italy, Sweden and Switzerland [/INST] all tumbled between 3.1% and 3.8%, while Holland and Belgium sank 2.8% and 2.4%, respectively. </s> |
1,870 | <s>[INST] In Latin America, Argentina [/INST] plunged 7.8%, Mexico 2.4% and Brazil 2.9%. </s> |
1,871 | <s>[INST] But before Wall Street recovered much of its [/INST] intraday losses, Brazil had been down as much as 10%, Argentina 9.5% and Mexico 7.4%. </s> |
1,872 | <s>[INST] Meanwhile, Russia's woes swept through Turkey, Poland and [/INST] the Czech Republic, where currencies wobbled and stock markets fell between 2.4% and 4.6%. </s> |
1,873 | <s>[INST] "We are in complete and utter meltdown; this is every bit as bad as the Mexican [/INST] crisis" of late 1994 and 1995, said Geoffrey Dennis, global emerging-market strategist at Deutsche Bank in London, in the midst of Friday's stock-market turmoil before Wall Street clawed its way back. </s> |
1,874 | <s>[INST] "What's frightening is it's [/INST] not clear what's going to stop it". </s> |
1,875 | <s>[INST] Across the board, companies and banks with actual, or [/INST] perceived, links to Russia and Latin America -- or emerging markets in general -- were hammered. </s> |
1,876 | <s>[INST] Spain's Telefonica de Espana, which has stakes [/INST] in telephone companies in Venezuela, Argentina and Chile, plunged 6.7%, to 6,700 pesetas. </s> |
1,877 | <s>[INST] French retailer Carrefour, which derives 34% of [/INST] its earnings from Brazil and Argentina, fell 5.4% to 3,500 francs. </s> |
1,878 | <s>[INST] "Latin America is a much more real problem as far as the earnings of [/INST] European companies are concerned, compared to Russia or the four main Asian casualties," says Joe Hall, head of marketing for European stocks at Deutsche Bank in London. </s> |
1,879 | <s>[INST] Ignacio Montero, head strategist for Merrill Lynch & Co. [/INST] in Madrid, reckons the region accounts for roughly 8% to 10% of Spanish blue-chip company profits. </s> |
1,880 | <s>[INST] Among the Spanish banks, Banco Bilbao Vizcaya, which has controlling stakes [/INST] in three Venezuelan banks, fell 8.5%, to 2,360 pesetas; at one stage, it was off as much as 12%. </s> |
1,881 | <s>[INST] Banco de Santander, which also has large operations [/INST] in Latin America, lost 9.9% of its value, to close at 3,375 pesetas. </s> |
1,882 | <s>[INST] France's Banque Nationale de Paris fell 5.6%, [/INST] to 439 francs, and Credit Lyonnais tumbled 6.6%, to 570 francs. </s> |
1,883 | <s>[INST] Investors chose to ignore the fact that German banks are among the world's [/INST] best capitalized and that they have put aside large reserves against their Russian loans, which stood at $30.5 billion at the end of 1997. </s> |
1,884 | <s>[INST] Investors also have ignored the fact [/INST] that a large chunk of that lending is government guaranteed. </s> |
1,885 | <s>[INST] Dresdner Bank dropped 6.7%, to 83 marks, Deutsche [/INST] Bank fell 5.3%, to 123.50 marks, and Commerzbank lost 4.9%, to 54 marks. </s> |
1,886 | <s>[INST] Friday's selling panic sent investors scurrying for the perceived [/INST] havens of the dollar, Treasury bonds, German government bonds, the pound sterling and Swiss franc. </s> |
1,887 | <s>[INST] Yields on 30-year Treasurys [/INST] and German "Bunds" fell to record lows. </s> |
1,888 | <s>[INST] Today, Russia is expected to reveal its plan for [/INST] rescheduling about $40 billion of ruble-denominated debt, of which $10 billion to $15 billion is foreign held. </s> |
1,889 | <s>[INST] "If Russia doesn't give the markets what they want, they won't be [/INST] able to sell a single security for two or three years," warns David Hale, chief economist of Zurich Insurance Group in Chicago. </s> |
1,890 | <s>[INST] What is more, he says, what [/INST] Russia does or doesn't achieve today "will have global implications". </s> |
1,891 | <s>[INST] If Russia is blacklisted by overseas investors, it will be [/INST] another blow to Mr. Yeltsin, whose resignation has been demanded by the Communist-dominated lower house of Russia's parliament. </s> |
1,892 | <s>[INST] "The fate of Venezuela, Brazil, Argentina, Mexico [/INST] and South Africa hangs very much on what Russia does," Mr. Hale says. </s> |
1,893 | <s>[INST] If Venezuela eventually devalues, as many analysts predict, it would represent a [/INST] continuation of the competitive devaluation cycle that has been cascading through emerging markets since early July 1997, when Thailand floated its baht. </s> |
1,894 | <s>[INST] But "rather than adding to competitiveness, each devaluation is simply crunching the devaluer, [/INST] because world confidence in [the country] goes down with the devaluation," says David Malpass, chief international economist at Bear, Stearns & Co. in New York. </s> |
1,895 | <s>[INST] "Witness Indonesia, Thailand, South Korea, Malaysia [/INST] and Russia; rather than growing, their exports have gone down". </s> |
1,896 | <s>[INST] Even though they have devalued, many emerging-market countries [/INST] still are forced to keep interest rates high to keep their currencies from falling further. </s> |
1,897 | <s>[INST] "The devaluations are causing a [/INST] giant human catastrophe outside the U.S.," Mr. Malpass says. </s> |
1,898 | <s>[INST] "Eventually, Americans will find themselves part [/INST] of a world that is moving sideways rather than up. </s> |
1,899 | <s>[INST] Farmers already feel it deeply in [/INST] lower commodity prices, because people in Asia are eating less". </s> |
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