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Opinion

Spanish crisis contagion, Brazil edition

With Brazil's central bank cutting interest rates, research from BAML shows that Alexandre Tombini may be right to be more concerned about growth than inflation.

Last week Brazil’s central bank president, Alexandre Tombini, cut interest rates to nine percent, the lowest level in two years and edging towards a 15-year low. Tombini had already warned he’d be cutting rates to around about that level, but what surprised analysts were the comments indicating the monetary easing cycle might well continue.   Tombini is clearly concerned about growth – certainly more than he’s worried about inflation – and, judging by a report put out by BAML's David Beker today, that isn’t entirely surprising. Things aren’t getting better quickly in Europe, and Brazil looks set be impacted by Europe's pain. 

“Europe is the largest origin of investment in Brazil. In 2011, total foreign direct investment from Europe totaled USD41.2bn, or 59.2% of total FDI (Chart 4). Between 1996 and 2011, average FDI originated from the old continent is 51.92% of total FDI.”


brazil20fdi20large.jpg

Judging by historic performance, the indications are clear: the European share of FDI in Brazil tends to take a hit when times are bad, and it doesn’t seem unreasonable to expect this time to be similar. To add insult to injury, Spain is the second biggest European investor in Brazil, and the third biggest overall – behind only the US and fellow eurozone-member the Netherlands. Between 1996 and 2011 Spanish investments represented 10.4% of FDI. 

If the crisis intensifies then Beker reckons Spanish businesses might take their begging bowl to Brazil to ease the pain, highlighting yet-more shifts in global financial power:

“If conditions in Spain deteriorate further and companies require more capital, Brazil could end up being the source for it. This could happen through higher profit and dividends outflows or actual sale of parts of those businesses in the country.”


The good news for Brazil is that its exposure to European banks is less than in much of the emerging world, with total exposure standing at 14.7% of GDP as of 3Q11. However, the good news is very much qualified by the situation in Spain. Half of the European exposure is to Spanish banks, particularly Santander – and Beker thinks that these banks are likely instigators of the aforementioned outflows from Brazil.


“This exposure data include the banks subsidiaries in the region and is a more comprehensive measure because financial troubles in the banking centers could lead them to take actions in the region, such as selling stakes, divesting operations or reducing risk assets to reduce capital needs once balance sheets are consolidated.”

Still, as recent events have highlighted, if foreign bank deleveraging gathers pace, there are a non-trivial number of capital-rich domestic predators that might pounce. Such stuff as Mr Esteves’s dreams are made on.

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