A shrug not a shudder

Aug 23rd 2007 | SÃO PAULO
From The Economist print edition

Brazil is the clearest example of Latin America's newfound financial stability

AP$160 billion-worth of calm

IN FINANCIAL circles, Latin America has long had a reputation as something of a “subprime” continent that periodically struggles to repay the money lent to it by reckless creditors. One might therefore expect Brazilians, who remember the crises of 2002, 1999 and 1998, to respond to America's current woes with empathy—and not a little fear.

Sure enough, Brazil's main stockmarket index, the Ibovespa, lost 17% of its value from July 23rd to August 16th. The Brazilian real has also fallen beyond the symbolic rate of two to the dollar. But despite this, investors and analysts seem to share the sunny attitude of the country's president, Luiz Inácio Lula da Silva. “Brazil is not afraid of this crisis,” he said this week. It is, he insists, “an eminently American crisis” caused by people trying to make a lot of “third-class money”.

Such contemptible folk have also left their mark on Brazil, of course. Its stockmarket has attracted foreign speculators, and its bonds have proved attractive to hedge funds, betting that Brazilian interest rates would continue to fall. Some of these investors have now been forced to pull out of Brazil to cover obligations elsewhere. But many are staying put. Yields on Brazil's sovereign debt have risen, but not by much. They remain just 2.17 percentage points above those on American Treasuries. And although foreigners were probably responsible for the bulk of Brazil's stockmarket losses, the Ibovespa is still up about 20% for the year in dollar terms.

That markets have not sunk further is testimony to Brazil's newfound macroeconomic buoyancy. The government's budget surplus, before debt payments, beat its first-half target this year. Thanks to booming commodity prices, the country also enjoys a healthy current-account surplus, which has helped the central bank to accumulate about $160 billion in reserves. In fact, Brazil is now a net dollar creditor, which means it has much less to fear from a fall in the real against the greenback. Indeed, a weaker Brazilian currency would help manufacturing exporters, who have been complaining of late that the real is too dear.

Nuno Camara of Dresdner Kleinwort, an investment bank, believes that the current turmoil may even hasten Brazil's attainment of investment-grade status. Once the dust has settled, he says, those countries that have “done their homework”, running up current-account surpluses and reserves, will see the money come back. This diligent group includes Chile, which has run bigger current-account surpluses than Brazil, and Peru. Mexico has been “medium-nice”, according to André Cappon of the CBM Group, a New York-based consultancy. It has kept its public finances in order and its prices stable, but it still has an external deficit and its economy is more exposed to a downturn in America. Other Latin American countries—namely Argentina, Ecuador and Venezuela—have been less strait-laced. Their risk premiums have risen significantly.

In the shakier past, a quick outflow of money from Brazil and its neighbours might have triggered weaker currencies, higher debt costs, faster inflation and punitive interest rates. But if Lula is right, that grisly economic plotline may no longer be so eminently Latin American.