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Brazil: Stocks Surge After IMF Bailout, Problems Remain

Government Hopes Aid Package Will Hurt Left Candidates

by Peter MuelloAssociated Press
August 8th, 2002

BRASILIA, Brazil -- Brazil's currency and stock prices soared Thursday on optimism that a $30 billion aid package from the International Monetary Fund will calm skittish investors, although the underlying problems that fed market anxieties haven't gone away.

The Brazilian currency, the real, rose nearly 4 percent, to 34.25 cents from 33.11 cents on Wednesday. It was the first time the real traded above 33.33 cents since July 25.

The currency was further bolstered when Central Bank President Arminio Fraga said the bank would sell dollars with no advance notice.

"Speculators got caught short," said Odair Abate, chief economist at Lloyd's Bank in Sao Paulo, Brazil's business center.

Stocks also headed upward. The main index at the Sao Paulo exchange, Bovespa, jumped 3 percent at the opening and added a couple more points during the day.

Officials hope the larger-than-expected IMF loan package will ease pressure on the real, reducing worries that Brazil might have to default on its $264 billion foreign debt and giving the government resources to bolster the world's ninth-largest economy.

"Now we have some breathing room," said Roberto Troster, chief economist at the Brazilian Banking Federation. "This will give a boost to the economy as a whole."

Some analysts warned, however, that the reasons investors soured on Brazil haven't changed. Credit dried up because of worries about spillover from Argentina's economic slump and concerns that aleft-of-center candidate could win Brazil's presidential election Oct. 6.

Argentina seems no closer to ending a 4-year-old recession that has left a fifth of its workers idle and forced it to suspend payments on its foreign debt.

In Brazil's presidential race, the candidate of the market-oriented government, Jose Serra, remains a distant third in opinion polls. The front-runners are former union leader Luiz Inacio Lula da Silva of the leftist Workers Party and former finance minister Ciro Gomes of the center-left Labor Front, neither viewed as open to free markets.

President Fernando Henrique Cardoso is barred by law from running for a third consecutive term.

"This crisis has a cause: the poor performance of Serra," said Jose Luciano Dias, a political analyst at Goes E Associados consultants in Brasilia, the capital. "No agreement could settle the political nerves of Brazil."

The government hopes the IMF package will do just that.

The deal provides $30 billion in loans for Brazil, in addition to a $15 billion IMF credit line already in place. Brazil will be able to draw $6 billion this year and the rest in 2003, after the new president takes office Jan. 1.

The only condition is that the government have a budget surplus, excluding interest payments, that is at least 3.75 percent of the country's economic output.

Finance Minister Pedro Malan said the support of all the presidential front-runners is crucial if the plan is to work and he urged them to publicly endorse the agreement.

On Thursday, Lula's running mate, Jose Alencar, said their party supported the budget surplus target. And Gomes' economic adviser, Mauro Benevides Filho, told Brazilian media that Gomes would honor the IMF agreement.

"They have no choice," said Dias, the analyst. "The alternative is unthinkable. They'll have to support it against their will."





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