Brazil battens down the hatches
The central bank has begun to address the financial crisis but must take more action.
Brazil’s central bank has had a tough month. In the two weeks between October 8 and 20, it was forced to spend $3.2 billion in the spot FX market to prop a continually faltering real.
The currency has lost more than a third of its value since the beginning of August as Brazil got sucked into the global financial crisis. The slide in the value of the real went beyond anyone’s expectations causing several Brazilian corporates, especially exporters, to reveal more than $2 billion of losses after making bad currency bets. By late October the government was offering FX funding for exporters through the BNDES, Brazil’s development bank.
Agricultural and retail companies look likely to be hardest hit after their treasuries took large punts on the real, only to see moves this month that were beyond any worst-case scenario their models would have predicted. By the end of October the government announced it would be willing to provide an additional $50 billion in foreign exchange swaps if needed.
Other measures the central bank has announced to safeguard Brazil’s financial system include potentially recapitalizing banks and corporates by buying preferred shares and arming itself with greater liquidity by creating currency swap lines with other central banks.