Brazil to Pump $50 Billion in Currency Market to Shore Up Real

By Andre Soliani and Jamie McGee

Oct. 23 (Bloomberg) -- Brazil's central bank will pump the equivalent of $50 billion into currency markets, its boldest move yet to stem a two-month, 28 percent tumble in the real that has saddled companies with losses and stoked inflation.

The real soared after the announcement, climbing 5.2 percent and erasing an initial slump of as much as 5.8 percent. Authorities said the injection will be in the form of contracts that will allow investors to protect against further declines in the Brazilian currency.

Today's plan responds to concerns that the real's tumble will bankrupt companies in Latin America's biggest economy after some of the biggest exporters reported more than 5 billion reais ($2.22 billion) in derivatives losses. Those worries stem in part from the collapse in Mexico of retailer Controladora Comercial Mexicana SAB this month following a rout in the peso.

Brazil has ``been aggressive, ahead of the curve compared to other central banks,'' said Gerardo Margolis, a vice president for emerging markets at TD Securities Inc. in Toronto. He said the $50 billion swap sale plan will help shore up the real for at least a few days. ``It's a huge number.''

Policy makers injected the equivalent of $22.9 billion into the foreign exchange market from Oct. 8 to Oct. 20 in the form of swap sales, dollar loans and outright dollar sales, central bank President Henrique Meirelles told a congressional committee in Brasilia on Oct. 21.

Brazilian companies may lose as much as $10 billion from currency derivatives after the real's tumble, Banco Itau Holding Financeira SA economist Tomas Malaga said today.

The Brazilian real's losses had quickened this week. It sank 11 percent the past two days amid concern that the global financial crisis will drive neighboring Argentina to default for the second time this decade.

`Forceful Approach'

The central bank followed up today's announcement by selling $2.3 billion worth of swap contracts and buying an unspecified amount of reais. The bank said in a statement it will hold further swap auctions to meet ``liquidity needs'' in the market. The swap contracts support the real by providing investors a hedge against its decline.

``The central bank is taking a forceful approach,'' said Vladimir Caramaschi, chief strategist at Credit Agricole do Brasil. The swap offer ``is another exit for those who need to cancel hedging positions.''

The real rose as much as 6.2 percent to 2.24 per dollar today. It traded at 2.2608 at 4:29 p.m. New York time, from 2.379 yesterday. The real plunged early in the day, falling to as low as 2.526 per dollar after Standard & Poor's said it may cut Russia's debt rating.

Commodities Slump

``You have Argentina, the Russia downgrade,'' said Flavia Cattan-Naslausky, an interest-rate and currency strategist at Royal Bank of Scotland in Greenwich, Connecticut. She said she expects Brazil to pull out of the crisis because the country has ``deep'' money markets and growing investment.

The real has sunk 31 percent from a nine-year high of 1.5545 reached on Aug. 1 as the global crisis has driven down prices on the country's commodity exports and eroded demand for higher- yielding, emerging-market assets. Only the South African rand, down 35 percent, has fallen more over that time.

Brazilian prices, as measured by the IGP-10 index of wholesale, consumer and construction costs, rose 0.78 percent in the month ended Oct. 10 after declining 0.42 the previous month.

Brazil had foreign currency outflows of $3.39 billion between Oct. 1 and Oct. 21, central bank economist Altamir Lopes told reporters today in Brasilia. In September, before the global crisis deepened, the country received $2.8 billion in inflows from trade and investments.

Tax Scrapped

President Luiz Inacio Lula da Silva, seeking to reverse those outflows, eliminated today a financial tax on foreign investors' purchases of fixed-income securities and loans. Lula scrapped the tax, known as IOF, of 1.5 percent on foreign investors' purchases of some financial products and of 0.38 percent on foreign-currency loans, according to the Finance Ministry.

``This makes a lot of sense,'' Cattan-Naslausky said. ``No one likes capital controls.''

Brazil is ramping up interventions to prop up the real after building up a record $208.7 billion of reserves during a six-year commodities rally. The UBS Bloomberg CMCI Commodity Index has fallen 43 percent since peaking on July 2.

While the real's drop has bolstered the government's finances because it holds more foreign currency than it owes, some companies have been squeezed.

Companies ranging from pulp maker Aracruz Celulose SA to food processor Sadia SA and cement maker Grupo Votorantim announced currency losses of more than 5 billion reais ($2.19 billion) from hedges and bets that the real would extend a four- year rally.

`Stress'

The Itau forecast for as much as $10 billion in companies' currency losses represents a 23 percent loss on about $44 billion at risk in currency derivatives among Brazil companies, said Malaga, chief economist for the second-largest non-government bank. Former central bank deputy governor Paulo Vieira da Cunha last week said potential losses on the contracts may be a combined $27 billion.

``Nobody would imagine the currency could reach such a level,'' Malaga said in a phone interview. ``This problem will still cause stress for some individual companies, but we are not talking about the risk of a systemic crisis.''

To contact the reporter on this story: Andre Soliani in Brasilia at asoliani@bloomberg.net