Brazil Currency Plunges Again On Candidate, Debt Worries

By JONATHAN KARP
Staff Reporter of THE WALL STREET JOURNAL

SAO PAULO, Brazil -- In its second tumble in as many days, Brazil's embattled currency fell to a nine-month low under mounting worries of a looming debt crisis and the possible election of a left-wing Brazilian president in October.

The real was down nearly 3% at 2.795 to the dollar in late trading. The selloff defied encouraging inflation figures released Wednesday and the Senate's renewal of a key tax. It also followed the failure of the Central Bank for the second day in a row to place all of the debt it was offering the market.

That disappointment exacerbated investor jitters about Brazil's ability to roll over $2.4 billion in government debt due next week and billions more in federal and corporate bonds in coming months. It also raised the likelihood of International Monetary Fund support, either through Brazil's existing loan program or ultimately through additional aid.

"The markets are being pressed into a corner, seeing a continuous slip in the currency and a commensurate slide in confidence," said Larry Goodman, managing director of U.S. economic advisory firm Globalecon LLC. "This comes down to a cash-flow game. Certainly the threat of a more populist government is hanging over the market."

Left-wing opposition leader Luiz Inacio Lula da Silva holds a strong opinion-poll lead over government-backed candidate Jose Serra, who investors believe will continue Brazil's free-market reforms and control spending. Broader concerns about Brazil's slow economic growth and high public debt have forced bond and share prices lower for weeks. But the currency has lost more than 10% this month alone, and 17% this year.

This week's slide is likely to prompt government intervention. But unlike last year, when investors sought dollar-linked bonds to hedge currency losses from financial contagion from Argentina, banks and companies now want primarily dollars, which could force the government to sell foreign-exchange reserves. "The Central Bank has one less potent instrument to deal with this deteriorating environment," said Marcelo Carvalho, chief Brazil economist for Bank of America in Sao Paulo.

Some companies are choosing to pay off debt rather than roll it over at sharply higher interest rates, while others are shifting money overseas because of political uncertainty, economists and traders said.

Source: Wall Street Journal