-Caveat Lector- By Joelle Diderich BRASILIA, (Reuters) - Brazil raised interest rates Wednesday to halt a rapid weakening of its currency, but overseas investors appeared to have momentarily lost interest in the crisis gripping Latin America's biggest economy. Amid growing dollar flight and a renewed slide in its fragile currency, the Central Bank set interest rates at 35.5 percent in money markets, up from 32.5 percent on Tuesday. Economists said the rate increase was aimed at encouraging investors to keep money in the fixed-income market and prevent a further wave of dollar outflows, which totaled a revised $339 million Tuesday. But the move failed to appease nervous foreign exchange markets and the real resumed its slide, closing at a new low of 1.91 to the dollar, down 36.6 percent since the government first relaxed its stiff foreign exchange policy on Jan. 13. Dollar outflows remained high, with a net $400 million seen fleeing local foreign exchange markets Wednesday. ``Honestly, we don't have any sense of direction,'' said a foreign exchange analyst in Rio de Janeiro. ``I'm not making new predictions after my stabilization theory of 1.7 reals to the dollar became outdated quite some time ago.'' The rate hike also stoked fears that Brazil might default on its mountain of domestic debt, with economists pointing out that the Central Bank decision only added to the already astronomic cost of servicing debt. ``We're in a vicious cycle,'' said the Rio analyst. ``The government wants to contain capital flight with higher interest rates, but that just makes it tough for the government, especially when people are still worried whether Brazil can still pay its debts.'' Overseas investors took a calmer view of events, with credit rating agency Standard & Poor's saying Brazil was unlikely to restructure its local currency debt as this would inflict too much damage on its banking system. The decision to float the real forced the closure on Wednesday of a small Brazilian investment bank, but analysts said the sector was generally well-prepared for the abrupt devaluation. European markets rose modestly as fears that Brazil might be heading for an economic abyss eased, giving way to a sense of fatigue at the prospect of a drawn-out period of turmoil. ``There are still plenty of trip wires, but it's not a lost cause. It's not a Russia -- it's more like Mexico,'' said Nick Douch, emerging market currency strategist at Barclays Capital in London. He noted it took nine or 10 months for currency markets to settle down after Mexico's 1994 peso crunch. In the United States, the ongoing saga of President Bill Clinton's impeachment trial eclipsed Brazil's woes after the Senate rejected a motion to dismiss the case and agreed to hear witnesses including Monica Lewinsky. Two weeks into its most severe financial crisis in years, Brazil is striving to steady its currency as a first step to bringing back sorely-needed foreign capital and soften a recession expected to drag down the world's eighth-largest economy this year. But the country faces a tough dilemma. While high interest rates stabilize the currency, they aggravate recession fears and increase the nation's mounting 320 billion real ($172 billion) domestic debt, which many analysts think could force an unpopular restructuring later this year. Even with slightly higher rates, Brazil continues to watch dollars leave the country at between $200-550 million per day. More than $8 billion has been pulled out of foreign exchange markets in January alone. Salomon Smith Barney joined the list of banks painting a gloomy picture for Brazil. It revised its forecast for Brazilian gross domestic product to a six percent contraction in 1999, compared with its earlier estimate of a three percent decline. But the government received a small boost to its efforts to implement a sweeping fiscal austerity plan when Congress approved a streamlined version of its 1999 federal budget Wednesday including 8.7 billion reals in spending cuts. U.S. officials, reflecting concerns that the crisis in Brazil could drag down the whole of Latin America and hit U.S. exports, said the country had to continue on a sustained path of economic reform. ``The key is for Brazil to continue on a consistent basis on a sound policy path,'' said Treasury Secretary Robert Rubin. White House officials said Clinton would meet with economic advisers soon to discuss the crisis. Officials from the International Monetary Fund (IMF) continued their fact-finding missions in Brazil, paving the way for talks involving higher-level officials on the fate of a $41.5 billion IMF-sponsored international rescue package which Brazil received last year. IMF First Deputy Managing Director Stanley Fischer canceled a planned testimony to a U.S. Senate subcommittee on Wednesday, saying he was too busy dealing with the Brazilian crisis. Last Updated: 01/27/99 18:01 EST http://legalnews.findlaw.com/ Copyright © 1994-1998 FindLaw Inc. DECLARATION & DISCLAIMER ========== CTRL is a discussion and informational exchange list. Proselyzting propagandic screeds are not allowed. Substance—not soapboxing! These are sordid matters and 'conspiracy theory', with its many half-truths, misdirections and outright frauds is used politically by different groups with major and minor effects spread throughout the spectrum of time and thought. 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