RIO DE JANEIRO, June 13 (UPI) -- It is getting ugly for investors in Latin America, and nowhere is the brutal face of plummeting equities and bottomless currencies seen more than in Brazil, South America's largest economy.
The sell-off in Brazil has in part been blamed on new central bank accounting rules which force fixed-income funds to mark to market their assets in a step meant to make for more transparency. But the continuing specter of the socialist Lula da Silva winning October's presidential elections has made for a decidedly dour mood.
The fear of Lula, as he is known, has become so severe that Goldman Sachs introduced, according to a Sao Paulo daily and to the disdain of local players, a "Lulameter" used to gauge what affect a Lula presidency would have on the currency.
A report in the newspaper O Globo states that the Lulameter sees the local currency -- the real -- as dropping to 3.04 against the dollar in a best-case scenario should Lula win. If victory goes to the more market-friendly Jose Serra, the government's handpicked successor to President Fernando Henrique Cardoso, the real would be at 2.52, the Lulameter tells us.
Regardless, you know things have gotten quite sad for a country when international banks are creating economic tools one might see on a taping of Late Night with David Letterman in order to gauge how far a currency will fall.
In the last week, the real has dropped to its lowest level in eight months and has lost 50 percent of its value since being floated in 1999. It closed down 3.1 percent at 2.79 on Wednesday. This is placing tremendous pressure on domestic companies with debt in dollars.
International bond markets are not laying out the welcome mat for Brazilian companies, and the central bank is not cutting interest rates -- now at 18.5 percent -- because of inflationary worries, which makes borrowing at home costly. The bank is not expected to make any adjustments to the rate when it meets next week.
Officials within Lula's Workers Party call the "intervention" by foreign investment banks into Brazil's inner workings "irresponsible" and are issuing calls for Wall Street to calm down and not tinker with an election. Conveniently forgotten, of course, is that a lot of the capital floating about the country's markets comes from foreign sources, which naturally might have concerns about the direction the country takes.
Serra is running 20 points behind Lula in polls. Despite the dire warnings from international banks about what will come should Lula win, Serra is for now taking the high ground and trying to capitalize on his own good points rather than winning on a crisis sparked by Lula.
"I don't want there to be a crisis," Serra said, deftly noting this would be bad for the country. "I am thinking about Brazil, not of myself."
Serra went on to say that it "wasn't clear" if the worry of a Lula presidency and subsequent thrashing in the market were good for his candidacy. He might have also claimed he isn't positive that humans need oxygen to survive, for Lula is about the only thing breathing air into his campaign.
Serra declined to address this week on comments from George Soros, who according to local dailies said that should Lula win, Brazil will fall into economic chaos.
Serra did say that if he wins, he will keep Arminio Fraga in as central bank president. Fraga, who is widely credited with keeping the country calm at the worst moments of Argentina's fall, has come under fire of late for the new accounting rules and for a lackluster auction of treasury bonds.
The central bank, responding to investor demands in the face of political uncertainty, on Tuesday offered four-month notes, but didn't manage to sell all it wanted. The government offered two million fixed-rate bonds yielding 18.9 percent, but sold only 1.86 million. The offering of shorter-term paper adds to fears about the country's debt, some now due earlier, of course. The ratio of net public debt to gross domestic product at the end of April was 55 percent, despite promises by Cardoso to get that number down to 46.5 percent. This means that the government will have to cut spending if it is to retain a budget surplus, an unlikely move in an important election year. But the country's equities will continue to be punished if this debt burden isn't dealt with.
Some analysts in Brazil say these issues have more to do with the market jitters than Lula, though the two seem to feed on each other. "Actually, right now (the problems) aren't really Lula. The market is pretty much concentrated on its own worsening dynamics, and any marginal good news is not even taken into account," said Gustavo Reis, an analyst at the Rio de Janeiro-based investment bank Pactual. Reis also noted the situation isn't being helped by rumors of an imminent downgrade by Standard & Poor's which has been floating about.
As for the markets, in Brazil, the Bovespa index ended last Thursday 3.8 percent lower at 12,112. Energy company Electropaulo lost big on the day, shedding almost 12 percent, while the world's largest iron ore mining company CVRD lost 4.2 percent. On Friday, the Bovespa closed up 1.4 percent at 12,282 after central bank comments that it would intervene in the foreign exchange "whenever necessary." On Monday, the Bovespa rebounded, ending up 2.6 percent at 12,599 after a weekend poll showing Serra gaining ground on the socialist Lula. Tuesday brought a 3 percent loss to 12,210 after the lackluster sale of treasury bills and continuing worries about October's election. On Wednesday the Bovespa finished down at 12,132.98. The bank Bradesco lost 2.93 percent and long-distance carrier Embratel fell 3.93 percent.
In Mexico, the IPC index lost 2.6 percent to 6,791.91 Thursday, weighed by poor results on Wall Street. America Movil lost 6 percent after Merrill Lynch downgraded the company's near-term outlook to neutral from strong buy. On Friday, bargain hunters moved in, pushing the index up about 1 percent to 6,857.42. Telephone company Telmex gained 2.4 percent.
On Monday, the IPC ended slightly up at 6,835 as investors tried to keep track of a hectic day on Wall Street. America Movil lost more than 3 percent after news that SBC Communications may lessen its stake in the company. Tuesday saw a slight gain to 6,862.89 as Telmex rose 2.1 percent. Financial company BBVA Bancomer gained 3.7 percent after Merrill Lynch gave it a "strong buy" recommendation. Wednesday brought a loss to 6,801.65 as industrial group Alfa lost 2.57 percent and America Movil shed 1.78 percent.
In Argentina, the MerVal fell 1.4 percent to 288.36 last Thursday as energy group Perez Companc dropped 5.2 percent on news of a government quota on its oil exports. On Friday, the index rose to 294.61 as investors picked up cheap issues. Steel maker Acindar jumped 4.8 percent. On Monday, the MerVal shed 6.7 percent to 274.94 as a sell-off in Perez Companc led its shares down 6.6 percent after word that the company is entering into debt negotiating talks with banks. The company makes up more than 40 percent of the index. Tuesday brought a gain to 3.8 percent to 285.37 as Telecom Argentina gained 10 percent after losing for consecutive sessions. On Wednesday the index ended 3.38 percent lower at 275.72. Acindar lost 7.14 percent while Grupo Financiero Galicia shed 10 percent.
In Chile, the IPSA fell 0.6 percent to 90.42 last Thursday, then rose slightly to 91.2 Friday, buoyed by rising shares in Argentina and Brazil. Monday brought a loss to 91.1 Energy concern Enersis slid 3.5 percent as worries about its exposure in Argentina surfaced. Tuesday brought a drop of 1.5 percent to 89.78 as regional worries continued to weigh. On Wednesday, the index finished down at 89.09.
In Venezuela, the IBC index was 1.5 percent lower at 7,558 points last Thursday. On Friday, the index ended lower at 7,437, with heavyweight telephone company CANTV losing 4.6 percent. Monday brought a loss to 7,400, followed on Tuesday by a gain to 7,434. On Wednesday, the IBC ended flat at 7,435.54.