Sunday, October 26, 2008


Here is an interesting commentary by an Economist Tony Volpon who is located in Brazil. The situation there is not good. The Central Bank is doing all it can to hold things together, but it isn't easy. Here is the perspective of someone on the ground.

The incomprehensibly bad timing of the decision to publish a government decree
allowing for the purchase of private sector banks by public sector institutions
annouced this morning has led to serious doubts about the quality of Brazil's
banking sector even as both Fin Min Mantega and Central Bank Pres Meirelles
assured the market that this is just a "preventive" measure.
The decision to do this can only be attributeed to a very bad error in judgement
given the hyper sensitive market environment or the fact that, ministerial
claims notwithstanding, there are in fact problems in the Brazilian banking
Given the massive moves seen today, especially in interest rate markets (which,
unlike the much more commented stock market, really matters for the economy) the
morbid joke making the rounds is that if there were no banks broke yesterday,
there are today.
Of course none of this is a joking matter. While we cannot say with any
certainty that there are no problems in the banking system, the truth is that
Brazil's banking system is very concentrated in very large, well capitalized
banks. The recent market volatility, the likely hit as bad FX derivative trades
are unwound, and the credit losses that we will see as the economy slows will
certaily take their hits on our banks, but it is not conceivable that there is
now any type of systemic issue here, at least not even for the more pessimistic
likely scenarios.
The government has unfortunately not been very forthright about the real risks
that the Brazilian economy faces. Let us remember that there are key second
round elections to take place this Sunday. We can only hope they will be more
realistic afterwards. To still talk about 4-4.5% growth in 2009, as the Min Fin
still insists, does nothing but damage HIS credibility in a period where
credebility is a key necessity for fiscal and monetary authorities.
We see the panic and are running for cover. A lot of damage is being done, and a
lot of this is like a glass cup: easy to shatter, very difficult to put back
together again. The small glimmer of hope is the still on track normalization of
external credit markets. It is sad and unfortunate that we now have to deal with
this type of local bad judgement.

Good Luck and Good Currency Trading



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