from Follow the Money

Two things I never expected to see

April 7, 2007

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1. The spread (over Treasuries) on Brazil’s dollar bonds is now 120 bp.     I remember when …

2. Brazil added close to $25b to its reserves in a single quarter ($23.7b if you want to be precise).    Reserves rose from a tad over $85b to just under $110b.    Back during Brazil's most recent crisis, it often had -- after netting out IMF borrowing -- less than $20b in the bank.  At the end of 2004, a little more than than two years ago, Brazil only had $27.5b or so net of its IMF loan.   

The IMF’s total commitment to Brazil back in 2002 chalked in at a bit over $30b.   It was considered huge at the time.   And it wasn’t all disbursed in a quarter either.    The biggest quarterly disbursement was “only” $6.3b.  

Yet without the IMF loan, Brazil would have almost certainly defaulted on its external debt.    The big “China” surge in commodity prices wouldn’t have come along quickly enough to save Brazil from default.    

A country that needed a huge credit line from the IMF to avoid default five years ago now borrows in US dollars for only a bit more than the US Treasury.   Talk about multiple equilibria.

The foreign currency balance sheet of Brazil’s government has been completely transformed over the past five years.   Brazil used to have far more dollar debt than dollar reserves, and, to top it off, Brazil’s central bank sold a lot of insurance against further falls in the real when the real was under pressure.    The government was effectively short dollars and long real -- its balance sheet deteriorated when the real fell.  Now Brazil's government is long dollars.   It borrows from the world in real to buy dollar reserves ...  

The carry trade, you know.  It hasn’t gone away.  Who doesn’t want to borrow yen to buy real?   And if the central bank is going to step up its intervention to keep the real from appreciating further (the real is back to where it was in 2001, before the 2002 crisis), well, volatility in the real/ dollar should fall -- making it easier to lever the size of the trade up. 

There is nothing like getting a 12% or so spread (see Truman's slide 15) lending to a country that doesn’t need the money.  Brazil, remember, runs a current account surplus.   It doesn’t need to borrow Japan’s savings.

There isn’t much evidence that the pace of Brazil's reserve growth is about to slow either.  Unless something changes, $50b, or even $100b, in reserve growth for the year isn’t entirely out of the question.      

Brazil isn't the only emerging economy that saw its reserves soar in the first quarter.  Russia added $35b in the quarter;  India $20.2b (with one week left);  Malaysia $6.1b  Korea $5b and so on.  If only China would provide some indication of just how fast its reserves are growing ...

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