SUNS  4365 Tuesday 2 February 1999

Rio de Janeiro, Jan 29 (IPS) - A wave of rumours maddened the exchange market in Brazil Friday, lifting the dollar to 2.15 Reals, a 10% increase on the day before and 77% since the slide began on January 13.

Bank closures from Monday, the confiscation of savings accounts, a moratorium on domestic debt and price freezes are all concepts bandied about - the feared elements of possible emergency plans the government could suddenly bring in.

President Fernando Henrique Cardoso and interior minister, Pedro Malan, stated that none of these measures were going to be taken, reminding the public that confiscations, moratoriums and freezes have all failed in the recent past in Brazil.

Malan classed the devaluation of the Real to present levels as an exaggeration "with no basis in the foundations of the Brazilian economy," recommending "serenity, cold blood and firmness, to keep ears from hearing the rumours." He stressed the dollar will soon peak and then be worth fewer Reals than at present.

Meanwhile, Spain's Telefonica company cunningly offered to settle part of the outstanding debt of a 4.95 billion buy out of Telebras in July 1998, making a tidy billion dollars from the devaluation of the Real.

The Spanish company paid part in cash, and was left with a debt in Reals of $2.347 billion. This debt had been contracted in Brazilian foreign debt bonds issued in dollars, meaning that cashing in the bonds and paying off in Reals will leave the company with a tidy lump sum in hand.

Finance Ministry Executive Secretary, Pedro Parente, said new fiscal measures were not planned. The uncertainty of recent days has made it impossible to evaluate the need for additional measures without them having to be discarded in the near future, he argued.

Official explanations and reasoning in the market itself, on the lack of logic or bad timing of such measures, took the dollar to nearly two Reals, compared with a close of 1.95 on the commercial exchanges Thursday.

Meanwhile, the black market - traditionally reflecting uncertainties and fears - far exceeded legal bank rates, before settling to a more moderate maximum sale price of two Reals.

Friday's rumour-mongering, however, shows how low Brazilian government credibility has fallen. During the past of high inflation and frequent new government initiatives, the last working day of the week was rumour-propagation day.

And the financial month also ends Friday, offering bigger windows for speculation. For example, exchange levels on this day determine the value of dollar-linked public debt bonds in February.

Hence Friday's rise increases profits for the banks.

Recovering credibility is the great battle of the moment for the Brazilian government, stated Paul Volcker, former president of the US Federal Reserve, attending a seminar in Rio de Janeiro.

Volcker spoke up for government intervention in the exchange rate, stating that the market itself is incapable of defining a point of equilibrium.

In a capitalist world in global crisis, exchange is today a main concern in the world economy and strong oscillations are even occurring between the dollar and the yen, he stressed. Volatility makes free floatation more difficult, but Brazil has the chance of making a success of it due to its great economic potential.

With one of the most diversified economies in the world, Brazil has greater capacity to choose its direction and better conditions than other emerging countries, like Argentina and Mexico, in dealing with crises. The world economic slowdown is a factor which will help avoid a return to high inflation in Brazil, said Volcker.