G'day Bill, Of Brazil's financial swings and roundabouts, you ask: >I'm curious how this mechanism works. Could you lay out the actors, >and the events that occur for this to happen? I reported what happened in such general terms, 'coz that's how I got it from *The Economist*. I don't know the actual answer to this (I'm a complete finance simpleton), but I have a guestimate how it could happen. Plenty here can do much better, but I'm so grateful somebody has finally evinced some interest in Brazil, I'll put my neck on the block in the hope the inevitable corrections put my mind at ease. If a 'hedge fund' (worth scare quotes, I reckon, as the term's meaning is apparently changing) load up on the local currency over a period of time (anticipating a much-heralded IMF injection in such a strategically important economy), a few billions' worth, what situations would they be confronting when the injection does come? They know the IMF bail-outs are attempted via the finance system (after all, business has to have 'certainty', dunnit?), but they don't necessarily know what the government will do with its money (unless the IMF telegraphs its conditions - and if it were a horse, its form might well be taken as a better pointer than is the case with most conveyances, eh?). If the currency is particularly sick, they've a good chance the Brazilian government will try to put a floor under it by buying it (the government has no way of knowing such a significant amount of currency power is in one hand - no-one knows what the big hedge funds are up to - after all, they're not obliged to tell anybody under our 'transparent' system). The currency quickly exceeds the price the fund paid, and the fund unloads the lot overnight, mebbe making a billion on the spot, and also depleting the government of its borrowed reserves, and also (given the volatile ambience definitively associated with such a scenario) starting a run on the currency. This next bit, I got from Henry Lui over at LBO, who has described details of an attack on the Hong Kong Dollar in August. Suddenly out of readies, the government seeks then to protect the currency by way of interest rates (the IMF will probably demand this, anyway). As they go up, the stock market takes a kicking. Said hedge fund could just happen to taken positions 'predicting' just such a fall (they could have bought 'em up as recently as the night they dumped their billions) and they make a mint on both sides of the Brazilian coin. The fund could unload its futures winnings, too, handing the local currency yet another bath. Brazil's government is down a heap of borrowed money but its stock market is in peril now. Interest rates have to drop. If the fund decides not to unload its newly won Brazilian currency, it could just wait for the next 'IMF bail-out', and mebbe pick up some cheap futures against a stock market now apparently in recovery ... after all, no-ones fixing what is decidedly broken ... Of course the government could do something else with the IMF money. It all depends on whether the IMF will let 'em, I s'pose - but who'd bet on that? I've no doubt it's not this simple, and have some doubt it's even close, but someone'll come along in a minute, Bill ... Cheers, Rob.
