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Essay on Brazilian Crisis
The intensifying financial crisis in Brazil, marked by sharp devaluation of its currency in mid-January, has renewed concerns about the consequences for U.S. agriculture. Latin America and Asia together bought about 60 percent of U.S. agricultural exports last fiscal year, and Brazilís currency devaluation is already having repercussions in other countries in Latin America.In Brazil, the Cardoso governmentís initiation of the Real Plan on March 1, 1994 led to 4 very good years. The plan brought economic stability and was effective in curbing hyperinflation, which had been a chronic problem. Under the plan, the real (R$, Brazilís currency) was set against a predetermined goal relative mainly to the U.S. dollar using a ìminibandî mechanism that allowed only small daily changes in the value of the currency.
As the U.S. dollar strengthened in the mid-1990s, however, the real began to overvalue relative to the target. The Russian financial crisis in August 1998 heightened fears among investors concerning returns in emerging markets. As capital flight picked up, observers began speculating that the Brazilian government would devalue its currency. From mid- August 1998 to the end of October 1998, the real had lost 2 percent of its value against the U.S. dollar through the miniband mechanism.The final development leading to sharp devaluation of the real came on January 6, 1999, when a provincial governor, a former President of Brazil, announced a 90-day moratorium on debt payments to the central government to protest strict fiscal measures under an agreement with the International Monetary Fund (IMF). The move raised investorsí fears, spurring capital flight. Reportedly, about $1 billion left the country in the few days immediately following the debt moratorium.
Recognizing that the real was under attack, Brazilís Central Bank decided on de facto devaluation on January 13, 1999 by widening the band in which the real could be traded each day while preventing a free fall in the currency.......
