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Thursday, August 16, 2007

Sell-Off Of Brazilian Assets

From the FT Today:

Brazil’s financial assets hit by global turmoil

By Jonathan Wheatley in São Paulo

Published: August 15 2007 23:18 | Last updated: August 15 2007 23:18

Brazilian financial assets broke through significant support levels on Wednesday as turmoil on global markets threatened to reach a part of the world that had seemed relatively free from contagion.

“Brazil is not immune at all,” said Christian Stracke of Credit Sights, a research firm. “Brazil is arguably more exposed to the global economy and to global financial markets than ever before.”

Much of the fall in Brazilian assets is explained by investors selling to cover losses in other markets.

But the extent of the slippage suggests investors may be sensing Brazilian assets are riskier than previously suspected.

Brazil’s currency, the real, lost 2 per cent against the US dollar on Wednesday to break below R$2.00 for the first time in three months.

The São Paulo Stock Exchange Index fell 3.2 per cent to 49,285 points, its first close below 50,000 points since early May, bringing losses over the past month to more than 15 per cent.

The sell-off came as fear spread around global markets that contagion from the US subprime lending crisis was spreading to other asset classes.

“This is no longer a subprime crisis, this is a full-blown structured product crisis,” Mr Stracke said.

As recently as last week fund managers said Brazilian markets were immune to contagion because they were free of high-risk, illiquid securities. “What’s happening is a massive unwinding from risk, and it’s hard to see Brazil falling into that category any more,” said one New York hedge fund manager.

But analysts such as Mr Stracke argue that foreign investors have become exposed to high-risk credits in Brazil through the large amount of debt raised overseas by Brazilian financial institutions.

Last year, $18.8bn entered Brazil as foreign debt, the vast majority raised by banks. They invested some of it in high-yielding public securities. But a significant amount was passed on as consumer credit.

Total financial sector credit in Brazil stands at about $395bn, of which $135bn is consumer credit and $260bn, corporate. Foreign banks account for 36 per cent of the total, according to Anefac, a financial markets association that monitors credit.

Consumer credit is the engine of recent growth in Brazil. The economy grew by 3.7 per cent last year and will grow by about 4.5 per cent this year – a significant improvement on the average of 2.5 per cent over the previous 15 years.

Yet the credit that is fuelling growth is extraordinarily expensive for various historical reasons. Credit card debt bears interest of 224 per cent a year, according to Anefac. The overdraft rate is 145 per cent. Even debt with a reasonable level of collateralisation, such as payroll-linked or car loans, costs between 15 and 33 per cent a year.

It is this credit to which international investors are indirectly exposed. Roberto Vertamatti, director of Anefac’s financial committee, said such risk was so far perceived as of little significance. “But there is always a risk and the exposure is certainly there,” he said.

Mr Vertamatti said some 15 per cent of Brazilian credit was securitised through instruments such as receivables funds, often traded between financial institutions. He said the risk that Brazilian banks could be exposed directly to subprime lending in the US was minimal and would easily be dealt with by the central bank relaxing restrictions on liquidity.

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