Bloomberg News

Brazil Rejects Bids in Dollar Auction to Stem Liquidity Squeeze

December 16, 2011

Dec. 15 (Bloomberg) -- Brazil’s central bank rejected all bids in an auction today to sell and repurchase dollars aimed at stemming a liquidity squeeze affecting local lenders.

The real extended gains after the central bank announced that it was offering repo agreements for the first time since the credit crunch following Lehman Brothers Holding Inc.’s 2008 collapse. Investors pulled $1.5 billion out of Brazil from Oct. 1 through Dec. 9 as they fled to lower risk investments to protect themselves from the deepening European debt crisis.

While Latin America’s biggest economy isn’t facing a credit crunch like there was in 2008, dollar-hoarding by banks is “distorting” the foreign exchange market, driving down the real and curtailing trade financing, said Jankiel Santos, chief economist at Espirito Santo Investment Bank.

“This is going to interrupt the weakening trend of the real, and it’s going to introduce some order into the market, but it’s not going to really bring the real to a much lower level,” Santos said in a phone interview from Sao Paulo.

The repo mechanism, which is the equivalent to lending dollars to banks, is aimed at guaranteeing liquidity in the interbank lending market. An official at the central bank, who can’t be named due to internal policy, said that liquidity tends to diminish toward the end of the year.

The bank in today’s auction offered to deliver dollars on Dec. 19 and repurchase them on either Jan. 18 or Feb. 16.

Brazil’s currency has declined 8 percent against the dollar in the past three months, the third-worst performance of the world’s 16 most-traded currencies. The currency strengthened 1.2 percent as of 9:22 a.m. New York time, ending a three straight sessions of losses.

The last time the repo mechanism was used was in April 2009, when the bank sold $500 million.

Central bank President Alexandre Tombini said from Washington in September that policy makers stand ready to provide necessary liquidity to ensure that foreign exchange markets work “properly.”

--With assistance from Josue Leonel in Sao Paulo. Editors: Joshua Goodman

To contact the reporters on this story: Andre Soliani in Brasilia at asoliani@bloomberg.net; Matthew Bristow in Bogota at mbristow5@bloomberg.net

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net


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