-Caveat Lector- >From http://cbs.marketwatch.com/news/story.asp?siteid=mktw&dist=mktwmore&guid=% 7BB7D6039D%2DF745%2D4FF7%2DB87E%2D5A6AE798A22F%7D
THOM CALANDRA'S STOCKWATCH It's Brazil on the brain Elections could imperil money-center banks By Thom Calandra, CBS.MarketWatch.com Last Update: 10:56 AM ET Oct. 4, 2002 SAN FRANCISCO (CBS.MW) -- This weekend's fiscal trigger for turmoil is the Brazil elections, which take place Sunday in South America's largest economy. Brazil's bouts with hyper-inflation in the 1990s are as fresh in the memory of most folks down there as the nation's World Cup victory this summer. The crash of the country's previous currency, the cruzeiro, turned Brazil's middle-class consumers into paupers back then. When the dollar-pegged real was introduced in 1994, inflation stabilized -- until this year's currency and stock-market crash in Brazil once again sent the country's economy reeling. Ian McAvity, a longtime Canadian newsletter editor who is attending the Contrary Opinion Forum in Vermont this week, is keeping an eye on the Brazil elections this weekend. "It could jolt the system if the leader going in wins over 50 percent to avoid the need of a subsequent runoff election," McAvity said Friday. Luiz Inacio Lula da Silva, head of the left-wing Workers Party, is favored to win that election. Brazil has more than $260 billion of debt, much of it borrowed from the world's big banks. "It smells like his early plans probably will include some strong words for the International Monetary Fund, like 'Get out of here,' and that could impact money-center bank loan exposures badly," says McAvity. "Serious threats of a Brazilian debt default could derail the stock market's rally attempt in the next few days." The big bank stocks have been hit hard since Brazil's election polls started streaming across the news wires in mid-August. Citigroup (C: news, chart, profile) and others are down 15 percent and more in the past 45 days. Brazil's Lula, the name the former metals worker goes by, says those who have short-sold his country's currency to all-time lows will pay the price once he is elected and the currency rebounds. Alas, Team Brazil's real has lost more than a third of its value since Jan. 2, making Lula's warning to currency speculators take the shape of a promissory note. "Watch the Sunday night news," says McAvity, editor of newsletter Deliberations on World Markets. Brazilians, beset by their battered currency and the soaring prices a cheap currency inflicts on a nation such as Brazil, will be watching their cash flow, and so will the big banks in New York and London. That cash flow next week could be the swirl down the loo of big banks' Brazil loans and International Monetary Fund-sponsored debt. The IMF in September approved a $30 billion Brazil loan and insists Brazil has no need to restructure its debts. The IMF would allow Brazil's central bank to spend as much as $16 billion to defend the real. Currency speculators, it is fair to say, are licking their chops. Thom Calandra's StockWatch by e-mail You can get free delivery of Thom Calandra's StockWatch every trading day. Sign up for Thom Calandra's StockWatch newsletter at MarketWatch.com. No strings attached. Subscribe today Thom Calandra's StockWatch is in its seventh year at CBS MarketWatch. � 1997-2002 MarketWatch.com, Inc. All rights reserved. Disclaimer. See our Privacy Policy - updated 6/25/02. 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