Brazil financial crisis sends world markets into turmoil

Double blow sends share prices plunging across the globe

$41m bailout in doubt as Brazil abandons defence of currency

Concern grows over China as $3bn debts are revealed

THE WORLD'S financial markets plunged into turmoil yesterday following clear signs that the crisis in emerging markets is far from over.

Brazil abandoned its attempt to defend its currency, a condition of the rescue package it negotiated with the International Monetary Fund in November. The move triggered the resignation of Gustavo Franco, governor of the country's central bank, and called into question the future of the $41.5bn bailout.

The Brazilian drama followed the earlier news that Guangdong Enterprises, the Chinese government's holding company for businesses in the province, had debts of $2.94bn. Foreign investors in those businesses will be asked to provide new capital to refinance them.

The double whammy sent stock markets reeling, although shares in London and New York recovered from earlier lows.

The FTSE 100 index closed down nearly 184 points at 5,850, having dropped as much as 287 points. By noon in New York, the Dow Jones index was 158 lower at 9,316.86, after falling as much as 261 points in early trade.

The US Administration reacted with barely concealed nervousness to the Brazilian moves. A collapse of the Latin American economy would hit US trade very badly at a time when the trade deficit is already soaring, and problems on Wall Street would very quickly dent the Administration's reputation as a solid economic manager.

President Bill Clinton made a statement backing Brazil, and urging it to continue with reform. "We have a strong interest in seeing Brazil, with whom we have worked on so many important things around the world, carry forward with its economic reform plan and succeed," he said.

US officials consulted with other Group of Seven nations, and US Deputy Secretary of the Treasury, Larry Summers, who covers international affairs, cancelled a trip to New York. Mr Summers, along with Treasury Secretary Robert Rubin, brokered the $41.5bn deal to prop up Brazil's economy.

The International Monetary Fund made no comment. It provided $18bn of last year's package, of which $5.3bn has already been disbursed. Brazil can draw another $4.5bn by late February as long as it meets the conditions of the package.

Deputy finance ministers from the G7 countries are due to meet on Saturday, and finance ministers and central bank governors will meet in Bonn next month. The dire economic situation in Brazil and the danger that China will be the next emerging economy to plunge into crisis will be on the agenda.

Brazil announced that its currency would trade in a new, wider range of 1.2 to 1.32 reals to the dollar, rather than the previous 1.12-1.22 reals. The rate fell immediately to the top of the new band, an effective 9 per cent devaluation.The move followed a renewal of massive capital flight, which reached $1.2bn on Tuesday.

Fernando Henrique Cardoso, Brazil's president, pledged that congress would approve his government's budget-cutting plans, another key part of the IMF programme. He also announced plans to increase the tax on financial transactions.

Francisco Lopes, the new central bank governor, tried to stem speculation about further devaluation, and said Brazil had almost $45bn in foreign exchange reserves as ammunition to defend the new range.

The Bovespa share price index had fallen 10 per cent in early trading and was closed for half an hour, but recovered to a 5 per cent fall by late afternoon.

US banks have around $74bn of loans to Latin America, of which $25.6bn is to Brazil, according to figures published by the Federal Reserve in October. Chase Manhattan, the biggest American lender to the region with loans of $13.6bn and recent owner of Banco Patrimonio de Investimentos, the country's third biggest investment bank, fell $37/8 to $70. Citigroup which is Brazil's eighth largest private sector bank fell $6.75 to $49.

In London, National Westminster Bank was the hardest hit, its share price falling 10 per cent at one point, despite having minimal exposure to Latin America. Lloyds puts its total loan exposure at pounds 1.3bn, less than 0.8 per cent of total assets. HSBC has around $2.5bn of Brazilian loans outstanding.

Stock markets in Madrid and Lisbon, perceived as having the largest exposure to Latin America, were worst hit. Madrid's benchmark index tumbled by 6.8 per cent, while in Portugal leading shares fell by 3.7 per cent.

In Germany shares in Deutsche Bank fell 7.3 per cent, while rival Dresdner saw its shares tumble by 8.1 per cent. The benchmark Dax Xetra index closed down 214.01 points, or 4.1 per cent, at 4982.12.

In the Far East, concerns about China's debts sent Hong Kong's Hang Seng index down 437.79 points to close at 10,273.77.

Investor flight to quality sent US and Western European bonds soaring, and yields fell to near-record lows.