Bloomberg News

Brazil Real Falls to Weakest in 10 Months on Greek Debt Concern

September 12, 2011

Sept. 12 (Bloomberg) -- Brazil’s real tumbled to the weakest level since November on concern Greece may default on its debt, limiting capital inflows to emerging markets.

The real sank 1.7 percent to 1.7026 per dollar, from 1.6741 on Sept. 9. It earlier touched 1.7274, the weakest level since Nov. 29.

The yield on Greece’s two-year note climbed toward 70 percent even after the government announced a new set of measures to meet the 2011 deficit goal in its European Union-led rescue. Moody’s Investors Service may cut the ratings of French banks BNP Paribas SA, Societe Generale SA and Credit Agricole SA this week because of their Greek holdings, two people with knowledge of the matter said.

“Everyone is very afraid of a Greek default,” said Andre de Carvalho Ferreira, director of Nova Futura DTVM Ltda., a brokerage firm in Sao Paulo. “You never know what’s going to happen. There’s no upside to hold the real. There’s more to go.”

The Brazilian currency fell as much as 3.1 percent earlier today. It pared some losses after the Financial Times reported that Italy’s government was in talks with China Investment Corp. about “significant” purchases of Italian bonds and investments in strategic companies.

Yields on Brazil’s interest rate futures contract due in January 2013 fell 10 basis points, or 0.1 percentage point, to 10.61 percent.

‘Longer Crisis’

The international economic crisis will last longer than the one in 2008, weakening growth and tempering inflation in Brazil, central bank President Alexandre Tombini said in an interview with Sao Paulo-based newspaper Valor Economico published today. Commodities prices may remain at current levels, growth in Brazil’s labor market may decelerate and inflation for services will slow, he said.

“Tombini is talking about a longer crisis,” said Rafael Espinoso, an analyst at CM Capital Markets Ltda. in Sao Paulo. “There’s no doubt that rates will fall. The question is for how long and the magnitude of the drop.”

The yield on the contract due in January 2013 has declined 47 basis points since policy makers cut the benchmark Selic target rate a half point to 12 percent on Aug. 31 after raising it at their previous five meetings this year.

Greek Prime Minister George Papandreou is struggling to convince investors that Europe’s most-indebted country can avoid a default that threatens to roil the euro region. Officials in Chancellor Angela Merkel’s government are debating how to shore up German banks should Greece fail to meet budget-cutting terms of its aid package, three coalition officials said Sept. 9.

Effect on the Real

The crisis in Europe is having a greater effect on the real than the Brazilian government’s earlier measures to contain its appreciation by imposing taxes on foreign investments in real- denominated assets, said Francisco Carvalho, currency director at Liquidez DTVM Ltda.

Brazil imposed a 1 percent tax on currency derivatives in July to weaken the real, which strengthened to a 12-year high of 1.529 per dollar on July 26.

“Everything depends on a solution for Europe’s most indebted nations,” Carvalho said in a telephone interview from Sao Paulo. “What the government couldn’t accomplish, the market is doing now.”

--With assistance from Josue Leonel in Sao Paulo and Andrew Davis in Rome. Editor: Marie-France Han

To contact the reporters on this story: Gabrielle Coppola in Sao Paulo at gcoppola@bloomberg.net Ye Xie in New York at yxie6@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net


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