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Brazil’s Currency Crisis. By Team IV ( Chris Trick, Austin Weaver, Tim Moore, Pat Heffernan, Chris Barnes. Why Brazil Matters. Biggest economy in Latin America One of the last big countries to attempt free trade and privatization; if this fails international investors discouraged.

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Brazil s currency crisis

Brazil’s Currency Crisis

By Team IV ( Chris Trick, Austin Weaver, Tim Moore, Pat Heffernan, Chris Barnes

Why brazil matters
Why Brazil Matters

  • Biggest economy in Latin America

  • One of the last big countries to attempt free trade and privatization; if this fails international investors discouraged.

  • Unified global economy is threatened if Brazilian currency fails.


  • Brazil had been through 6 currencies since the 1960’s

  • In 1994 the Real Plan was adopted

  • Before it were a series of failed plans (the Cruzado Plan of 1986, Bresser plan of 1987, and more)

  • It worked well to tame inflation and maintain exchange rate stability for 5 years


  • The Real was initially indexed one-for-one with the dollar

  • It was quickly allowed to float though

  • A policy of high interest rates to discourage speculation and over-borrowing quickly attracted a surge of capital inflows

  • By the mid 1995 the Real Plan evolved into a crawling peg


  • Said to be the worst currency crisis in the western hemisphere to date

  • The Real Plan was one of the longest running exchange rate stabilization programs

Facts of life before crisis
Facts of Life Before Crisis

  • 43% of Brazilians – over sixty million people - lack the essentials of a decent life

  • One in three children drop out of school without completing primary

  • Drug gangs rule the favelas and the middle class lives behind bolted doors

  • Half a million North-eastern farmers watch crops wither in yet one more drought

  • The urban environment, home to four out of five Brazilians, is deteriorating fast

  • Blacks, over-represented amongst the poor, suffer social discrimination

  • Indians face severe threats to their economic and cultural survival

  • The income gap between men and women is the worst in Latin America

Why peg to dollar
Why Peg to Dollar?

  • Needed to convince domestic and international investors that chronic inflation would be stopped.

  • Before Real Plan, inflation was 3000%.

  • Fixing the exchange rate was easier then reducing government commitments.

The fall
The Fall

  • It was in a financially fragile state

  • It required large capital inflows to build up the central bank to defend currency

  • This built investor confidence and led to exchange rate appreciation

  • This fueled import-driven consumption and stifles export growth

  • In order to attract the inflows the real interest rate had to rise

The fall1
The Fall

  • The high interest rates lead to a rising debt burden and a deteriorating fiscal balance

  • A rising budget deficit and deteriorating trade balance inevitably lead to devaluation

  • It just could not finance its current account deficit due to insufficient long-term instruments

The fall2
The Fall

  • Investors came to believe the capital inflows were insufficient to finance its current account deficit

  • Productivity did grow from the imported capital goods

  • The industrial restructuring it caused was not enough to fight off the deteriorating trade balance as unemployment rose

The fall3
The Fall

  • Speculative pressure built up and it became harder and harder for the central bank to maintain the rate

  • Eventually the peg had to break; calling for a floating rate.

Other reasons
Other Reasons

  • The political power of the elite prevented tax hikes and to encourage exports it could not impose higher taxes on manufacturers

  • The public sector had won generous pensions and benefits that the government could not afford any longer

  • Dismantling these programs would have led to further social instability

Other reasons1
Other Reasons

  • Given the political paralysis it is difficult to see how the prolonged overvaluation of the currency could have been avoided

How much was lost
How Much Was Lost

  • During the first 6 months of speculative attack currency loss totaled $35 billion!!!

  • After the first 3 months of 1999, US reserves went from $70 billion to about $32.9 billion.

Foreign influences
Foreign Influences

  • The other currency crisis in Asia, Russia, and Mexico made the peg increasingly fragile

  • Short-term capital flew faster into Brazil and the government had to sell off 10 billion dollars in reserves and hike interest rates from 21 to 44 percent

  • This worked for a short time until the crisis hit January of 1999 unexpectedly

Crisis recovery
Crisis Recovery

  • Managed a quick recovery compared to other major currency crisis to date.

  • Due to banking system being ready to handle both severe economic shocks and policies.

  • Commercial banks able to take extreme measures to calm and stabilize markets.

Brazil s currency crisis

A guy who came to International Finance for the first time, his @$$ was a wad of cookie dough. After a few weeks, he was carved out of wood. -Johnny Stiver