"Business As Usual"

Peninsula de Maraú- Building sites and bromeliads overlooking the beach.

Insulated from the U.S. credit crunch, Brazil powers ahead....

Monday, February 18, 2008 - Vol. 10, No. 41
Amid Global Credit Crunch, It’s “Business as Usual” in Brazil

By Mike Burnick, Senior Editor and Global Markets Analyst and editor of Market Shock Trader.


The U.S. credit crunch is far from over as vulture-investors, and Warren Buffett, now circle the troubled monoline insurers. These distressed insurers, including Ambac and MBIA, are the latest victims of the “repricing of risk” as the Oracle of Omaha calls it.

However, several thousand miles and worlds away from Wall Street, the credit crunch appears to be having little spillover impact on South America’s biggest economy.

“Brazil’s credit markets are shrugging off the effects of the U.S. sub-prime mortgage debacle and maintaining business largely as usual,” according to a recent story in the Financial Times.

This is a significant statement considering how much of a fiscal basket-case this country has been in the past. Brazil was once the poster-boy for financial miss-management. Spiraling inflation, massive debts and a chronic history of currency devaluation is Brazil’s legacy from the 1970s and 1980s. But not anymore.

From Fiscal Basket Case to Paragon –
in Under 20 Years

Today, Brazil looks like a paragon of fiscal virtue compared to the United States. Brazil has paid down its foreign debts significantly in recent years. Inflation is low and has been falling, while interest rates are steadily coming down too.

Even the Brazilian real is one of the world’s strongest currencies. It’s appreciated about 8% against the greenback over the past year. That’s quite a reversal of fortune for Brazil.

Credit Crunch: Don’t Blame It on Rio –
Where It’s Business as Usual

Business conditions in Brazil have slowed somewhat this year, as is the case around the world. However, “overall credit markets are calm.” For one thing, bank lending in Brazil continues at a steady pace, even while the big European and U.S. banks are scared to lend.

Brazil’s total “stock of credit” stands at just 35% of GDP. That means Brazil is much less leveraged than many other financial markets. Brazilian firms carry much lower debt loads than many foreign competitors too.

The reason Brazil appears relatively insulated from the Wall Street credit crunch offers more evidence of financial “decoupling” at work. That’s also the case in Asia right now. The main source of Brazilian credit has been a steady advance in the domestic savings rate. This has been driven by “investments in fixed income securities that are, in effect, closed to foreigners” due to taxation issues. Brazilian domestic savings are more than enough to take up the slack.

Brazil’s fast growing economy may slow somewhat this year, in the face of a global downshift. “But many companies are betting on the domestic market to make up the difference. For them, investment capital is still available.”

Perhaps the Brazilians would be willing to bail out MBIA...

There are other signs that Brazil has weathered the credit storm that has hammered many global markets. In fact, while the MSCI Emerging Market Index is down about 17% from its high last year, Brazil has declined just 8%. The blue-chip S&P 500 Index by contrast is still down about 13%.

Decoupling seems to be alive and well in South America’s largest and most vibrant economy. That’s a great indication of more potential gains ahead when global markets rebound. Brazil is certainly one market that I’ll be watching closely.

MIKE BURNICK, Senior Editor & Global Markets Analyst