Bloomberg News

Brazil Extends Tax on Foreign Borrowing as Rousseff Escalates Currency War

March 12, 2012

Brazil extended a 6 percent tax on foreign loans and bonds issued abroad by local companies to include lending with a duration as long as five years, the third measure taken this month to weaken the real.

The 6 percent tax, which was originally applied to foreign borrowing of as long as two years, had already been extended on March 1 to loans and bonds with a duration of three years. The central bank the same day extended the tax to some loans granted to exporters.

President Dilma Rousseff pledged last week to take all necessary measures to protect Latin America’s biggest economy from what she dubbed a “monetary tsunami” unleashed by rich nations seeking to devalue their currencies. Since Brazil started escalating efforts March 1 to contain a rally in the real, it has been the worst performing currency among the 16 most-traded tracked by Bloomberg.

“The arsenal that the government is using should help sustain the dollar,” said Francisco Carvalho, currency director at Liquidez DTVM in Sao Paulo. “The external environment also helps to push up the dollar.”

The real fell 1.4 percent to 1.8168 per U.S. dollar at 12:44 p.m. in Sao Paulo and earlier traded at a two-month low of 1.8193. Since March 1, the currency has weakened 5.6 percent.

Higher Yields

The central bank is also reducing the benchmark interest rate to discourage investors seeking higher yields from entering Brazil, Rousseff told journalist Luis Nassif, who published parts of the interview on his blog.

Today’s measure aims at reducing the flow of “speculative capital” that enter Brazil seeking higher returns than those offered by advanced economies, the Finance Ministry said in an e-mailed statement today.

The higher tax on foreign loans and bonds seeks to “restrain the foreign capital inflow for short-term investments in the country,” the ministry said in the statement.

Policy makers led by central bank President Alexandre Tombini sped up the pace of interest rate cuts last week, reducing the Selic by 0.75 percentage point after cutting it by half a point at each of their previous four meetings. The bank’s board trimmed the rate to 9.75 percent, bringing it to less than 10 percent for the second time since inflation targeting was adopted in 1999.

Investors and exporters have plowed $15.5 billion into Brazil since the beginning of the year, compared with an outflow of $3 billion in the last quarter of 2011, according to the central bank’s website.

Brazil’s inflation-adjusted interest rate is 3.91 percent, the second highest after Russia amid the Group of 20 most industrialized nations.

To contact the reporter on this story: Telma Marotto in Sao Paulo at tmarotto1@bloomberg.net; Andre Soliani in Brasilia at pr asoliani@bloomber.net.

To contact the editor responsible for this story: Helder Marinho at hmarinho@bloomberg.net.


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