Brazil - BRAZZIL - Disastrous Bank Rescue by Brazil's Central Bank - Brazilian Economy - May 1999

May 1999


The Brazilian central bank burned more than a billion dollars for nothing. A Parliamentary Inquiry Commission was established, but there's little hope that anything will change or that anybody will be punished.

Paulo Rebęlo

In the past month, Brazilian citizens became so excited about the possibility of having an increase in their minimum wage that they all seemed to forget the economic and "image" problems the government was facing with its own electors and, as usual, the international investors. The country has summoned the Parliamentary Inquiry Commission (PIC) in order to investigate supposed corruption between Banco Central do Brasil (Central Bank of Brazil) and two other minor banks, which could have earned millions of dollars atypically via a strange secret transaction.

The Real (Brazilian currency) was devaluated in the beginning of 1999 because Central Bank wasn't able to hold the currency value against ferocious investors anymore. This left those people whose contracts were based on the American dollar in trouble, not to mention taxes, including importing and exporting actions. Up until this point, one dollar (US$1.00) had a value of almost one Real (R$1.00)—about $1.20 Reals for each dollar. In only a few days, the currency was devaluated more than 70%; one dollar reached as high as $2.15 Reals. After the period of fluctuation stabilized, the currency fixed between R$1.60 and R$1.70 to the dollar, at which it has remained.

If you don't know anything about the Brazilian economy, try to imagine this situation: Brazil was known as the king of inflation for decades. Five years ago, the government controlled the inflation and gave citizens a very welcome pricing establishment. Citizens at the end of the month could purchase a product for the same price as the previous month. This was a dream come true, since inflation usually reached about 70% per month, and the money one gained would only have 30% of its value the following month. Quite difficult to shop, don't you think?

Then, in a matter of hours, everyone saw the dream vanishing with the loss in currency value. It was impossible not to fear the return of the inflation nightmare once again. One would see people talking about the minimum wage being tied to the inflation rate index on every corner (index in this context meaning that the minimum wage grows relatively to inflation). If this had happened, it would have signaled the coming of the nightmare.

Brazilian Central Bank prohibited the mass sending of dollars to other countries, since the country needed a backup currency as strong as the dollar in its safes. Everyone seemed to be all right as the economy was starting to steady again, and international investors were retreating from their usual compulsive running away when something unusual happens in an economy like the Brazilian one. After the chaos, the Brazilian press reported a supposedly irregular transaction between Central Bank, and two privately owned banks in the country, Marka and FonteCindam Banks.

The situation as described by the press, is that the Central Bank would have sold millions of dollars to Marka and FonteCindam during the devaluation for a mere R$1.22. After the period of stability the dollar was valued at R$1.65. Have you got it yet? Try buying millions of dollars with the Real valuing 1.22 each and sell them for 1.65 each and you'll realize how happy you would be…

At present, the government is faced with PIC because of that curious "help" the Central Bank gave those two minor banks. Brazil knows this really happened. According to Armínio Fraga's briefing, current president of the Central Bank (not the one in charge during the transaction epoch; Mr. Francisco Lopes was the C.E.O. at the time), the "help" given to Marka and FonteCindam Bank was necessary in order to avoid an economic break down. Those banks were supposedly facing many debts caused by the devaluation and could have shut down all together. According to the government report, that could have lead to an economic collapse in the Brazilian monetary system.

Focusing on that explanation, should the Central Bank help private banks in debt using money earned by taxes? The same taxes paid by the loyal citizens of Brazil? If so, why help only two insignificant (not anymore) banks when there are many, many others in debt thanks to the devaluation, including federal banks? And, finally, what economic break down are we dealing with? If in debt, shouldn't any private company quit its counts and close? Isn't the globalized world of investments and investors just like gambling? At least that is what the Central Bank and the International Monetary Fund (IMF) claimed to be the explanation for the devaluation.

What happens is that the case is far more complicated than it seems to be. First of all, Mr. Francisco Lopes refused to answer any questions raised by the PIC, causing suspicious behavior on the part of him and his commissioners. He is accused of forwarding and selling confidential information to investors and private banks during his period in Central Bank's Presidency. He's also accused of sharing confidential information anonymously with his own private economic adviser company, Macrometrica. This is extremely illegal, since, as president of the main government bank, he had access to secret internal information.

The press went further and discovered that Marka and FonteCindam were not individual cases. Strangely enough, a day before the devaluation began, other banks changed their investments in the market and bought as many dollars as they could, making an unimaginable amount of money. The PIC keeps on going and no one has been formerly indicted yet. As far as its known, Central Bank's "playing" burned two billion Reals (about US$ 1.2 billion in today's currency) from public safes. The banks that benefited from the devaluation are laughing aloud as the PIC is about to end. If nothing is done to the directors in charge at the time, the Marka investigation will be treated as something of the past.

Meanwhile, Mr. Alberto Cacciola, former owner of Marka Bank, keeps saying the press is unfairly haunting him. He asserts he's only a small fish in a big ocean. Unfortunately, he may be completely right. Anyway, Brazil not only has plenty of reasons to cry for what happened, but must also now live with the dollar valued at R$1.65. The IMF is rigorously applying their rules (destroying the less fortunate people, indeed). No one expects another devaluation or any problems with increasing prices.

The only option for the Brazilian community in Marka's case is to wait, watch and hope. Hope it doesn't end on nothing and hope the perpetrators are jailed immediately.

Paulo Rebęlo is a freelance writer residing in Recife, Brazil. He can be reached at over the Internet or by mail:
Rua Luís Barbalho, 120 / 701
Boa Vista
50070-120 Recife-PE

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