Brazil: Little margin for banking errors

When Brazil’s stock and bond markets lost a third of their value in late October as part of the Asian contagion, the country’s central bank intervened quickly to defend the real against currency speculators, raising interest rates from 21% to 43%.

The market turmoil created losses at financial institutions that had played a leverage game – borrowing dollars to buy Brazilian financial assets. But the question now is whether the government will be forced to continue to keep interest rates high to avoid a devaluation – and how much long-term damage to the banking system it would inflict.