Brazil battles crisis with new steps; currency jumps

Thu Oct 23, 2008 12:00pm EDT
By Stuart Grudgings
SAO PAULO, Oct 23 (Reuters) - Brazil's policy-makers took a raft of new steps on Thursday to tackle a liquidity drought caused by the global financial crisis, sending the currency surging against the dollar after heavy early losses.
The central bank twice intervened on the spot market to offer dollars and said it was ready to sell dollar swap contracts up to a hefty $50 billion.
The Finance Ministry said earlier it had scrapped a key tax that foreigners pay on financial market transactions.
After the new central bank steps, the real BRBY surged into gains against the dollar after earlier falling by about 6 percent to three-year lows past the 2.5 level. It was trading at 2.283, up about 4 percent on the day.
Brazil's main stock index, the Bovespa .BVSP, also reversed early losses of around 3 percent, trading up 0.38 percent at 35,203.38, a day after diving more than 10 percent.
U.S. stocks were up more than 2 percent as bargain-hunting outweighed growing fears of global recession.
Brazil's policy makers have rushed in recent weeks to provide liquidity to banks and financial markets.
Official steps have ranged from foreign-exchange swap auctions to increasing credit lines to farm and construction industries and allowing bigger banks to take over the loan portfolios of smaller banks in potential distress.
Market players said the authorities appeared concerned that sharply higher interbank rates could put some small and medium-sized institutions in danger.
"Apparently they are afraid of a systemic risk ... in the money market. So far, rates are still very high so the effectiveness is not clear," said Zeina Latif, an economist at ING in Sao Paulo.
Thursday's steps came a day after Brazil allowed its two largest state-run banks to buy stakes in financial firms, some of which it says could be facing difficulties from the drying up of credit in domestic markets.
NEW STEPS
One of those banks, Banco do Brasil (BBAS3.SA: Quote, Profile, Research, Stock Buzz) will increase car loans and possibly buy a loan institution to offer credit and boost falling auto sales, Minas Gerais state Gov. Aecio Neves said on Thursday.
The Treasury announced on Thursday it had canceled a regular auction of fixed-rate bonds due to volatile markets.
The Finance Ministry said it had eliminated a tax known as the IOF, which was 1.5 percent on currency exchange for inflows of foreign capital and 0.38 percent percent on foreign currency loans.
Later, the central bank held two auctions of dollar swap contracts worth a total of $2.27 billion. It said it was ready to expand its sales of such contracts to $50 billion, prompting the real's dramatic rebound.
The dollar surged against most other currencies for a second day as investors cut their exposure to risk globally.
On the stock market, oil giant Petrobras (PETR4.SA: Quote, Profile, Research, Stock Buzz) and mining firm Vale (VALE5.SA: Quote, Profile, Research, Stock Buzz) both gained slightly as the market turned positive.
Vale, whose shares have been hammered in recent weeks by falling commodities prices and the financial crisis, is due to announce its third-quarter results after the market close.
Petrobras, the top-weighted stock in the Bovespa index, was up 0.86 percent at 23.35 reais, while Vale gained 0.9 percent to 24.32.
Financial stocks were mixed after double-digit percentage falls on Wednesday. Unibanco (UBBR11.SA: Quote, Profile, Research, Stock Buzz) was down 2.75 percent at 12.4 reais after slumped 13.7 percent on Wednesday, while Banco do Brasil jumped 5.1 percent to 14.59 reais.