UPDATE 2-Brazil unveils measures to insulate banking system

Mon Oct 6, 2008 8:48pm EDT
(Recasts with new measures, adds comment, details)
By Isabel Versiani
BRASILIA, Oct 6 (Reuters) - Brazil's government unveiled a flurry of new economic measures on Monday, the latest in a series of steps aimed at insulating the country's financial system from the global credit crisis.
The government will issue a decree allowing the central bank to acquire loan portfolios of small and mid-sized local banks if needed. It also will give the central bank authority to extend credit lines in foreign currencies to local financial institutions.
"Prudent planning says it is important for a country to have a lender of last resort with significant resources," Central Bank President Henrique Meirelles said at a news conference in Brasilia, adding that he did not see any reason to use the authority to acquire loan portfolios at the moment.
Earlier on Monday, Meirelles gave a joint news conference with Finance Minister Guido Mantega to announce that the central bank will buy dollar-denominated bonds from Brazilian banks to increase credit lines in dollars for exporters.
Although Brazil's national monetary council still has to determine which bonds are eligible for the program, Meirelles stressed that the central bank will sell them back to the firms that held them at future dates.
The central bank has taken a series of measures in recent weeks to help alleviate a liquidity crunch in the foreign exchange market and the Brazilian banking system, which has so far only felt limited impact from the credit crisis that is battering banks in the United States in Europe.
Last month, the central bank resumed offering dollar repurchase agreements for the first time since February 2003, selling a total of $1 billion in repos in two auctions. It also relaxed mandatory reserve requirements for banks to increase liquidity and to allow large banks to acquire loan portfolios from small and mid-sized peers.
And on Monday, the central bank offered dollar swaps for the first time in more than two years, selling $1.47 billion of $2.1 billion on offer in an auction to quench surging demand for greenbacks in the foreign exchange market.
NO SOLVENCY PROBLEMS
The new measures were unveiled on the same day that Brazil's benchmark stock index plunged as much as 15 percent in early trading and the national currency posted its biggest loss in nine years as crisis-wary investors dumped emerging market assets around the globe.
Despite the market turmoil, Mantega said Brazil's financial system does not face the same solvency problems afflicting markets in Europe and the United States.
"There are no toxic assets here," Mantega said in the news conference with Meirelles. "We are working together, monitoring markets daily. Assets in Brazil are solid."
Nevertheless, Mantega acknowledged that Brazil's economy is not immune to the global crisis and urged governments around the world to act jointly to contain the turmoil.
Meirelles said a decline in foreign trade and the banking crisis in the United States and Europe was affecting liquidity of dollars in Brazil. The bank has some $23 billion available in dollar futures contracts it can offer without tapping the country's foreign exchange reserves, he said.
"The central bank is prepared to take additional measures if needed," Meirelles said. (Writing by Todd Benson; editing by Carol Bishopric)