Buying $1 Billion a Day Swells `Fiscal Cost' for Meirelles: Brazil Credit
Henrique Meirelles, president of the central bank of Brazil
Simon Dawson/Bloomberg
Henrique Meirelles, president of the central bank of Brazil.
Henrique Meirelles, president of the central bank of Brazil. Photographer: Simon Dawson/Bloomberg
Brazilian central bank President Henrique Meirelles is making his boldest bid in 11 months to contain gains in the real as traders estimate he’s buying as much as $1 billion a day in the foreign-exchange market.
The central bank purchased about $4 billion in the first four days of last week as the real jumped to the strongest since December, according to estimates by BGC Liquidez DTVM, the second-biggest currency broker on Brazil’s futures exchange, and Tendencias Consultoria Integrada. The purchases would be the largest over a four-day period since October 2008, when policy makers bought a record $4.6 billion.
While central banks from Japan to Colombia are beginning to weaken their currencies, Meirelles faces additional pressure as investors move money into Brazil to take part in a $78 billion share sale by state-run Petroleo Brasileiro SA. The real, the biggest gainer among all currencies since the end of 2008, touched a nine-month high of 1.7031 per dollar last week ahead of the offering, which will be the world’s largest share sale.
“The central bank intervention helps ease the appreciation of the real but doesn’t solve the problem,” said Felipe Brandao, director of emerging markets at ICAP Brasil, the fourth-biggest currency trader at the futures exchange in Sao Paulo. There are “a lot of inflows,” he said.
The central bank, which is seeking to shore up exports as the current account deficit climbs to a record, is slated to release details on last week’s dollar purchases on Sept. 22. It bought $815 million the first 10 days of September.
Budget Deficit
In stepping up intervention, Meirelles, 65, is adding to a budget deficit that reached its widest level in eight months in July. As the dollar purchases swell the central bank’s foreign reserves to a record $267 billion, the government turns over bonds to the bank that allow it to operate in financial markets and prevent the money supply from surging.
With Brazilian two-year notes yielding 11.49 percent, or 11 percentage points more than similar-maturity U.S. debt, the country loses money on the transaction, tacking about 24 billion reais a year to its deficit, according to Nathan Blanche, co- founder of Tendencia, a Sao Paulo-based economic research company.
The cost is about double the amount President Luiz Inacio Lula da Silva’s government spends on its flagship anti-poverty program, known as Bolsa Familia. Intervening in the futures market to weaken the real would be more cost effective, Blanche said.
Sovereign Fund
The current “policy has a direct impact on gross debt,” Blanche said in a telephone interview from Sao Paulo. “Even with the dollar purchases, the real is gaining and this shows the pressure is stemming from the futures market,” he said.
Policy makers last sold contracts allowing them to buy dollars in the futures market, known as reverse currency swaps, on May 5, 2009.
Finance Minister Guido Mantega, speaking at an event in Rio de Janeiro on Sept. 15, mentioned intervening in the futures market as one option the country has to slow the real’s rally. He said the government can also use its sovereign wealth fund to purchase dollars. He vowed to stem the real’s advance to help exporters, saying “we’re not going to lose this game.”
The central bank said in an e-mailed response to questions that it “doesn’t comment on possible future actions or on market rumors.”
Four-Month Rally
The real gained 0.1 percent last week to 1.7213 per dollar, extending its rally over the past four months to 9.4 percent as the country posts the fastest economic expansion in two decades. The real has surged 34 percent since the end of 2008, the most among all currencies tracked by Bloomberg.
The extra yield investors demand to own Brazilian dollar- denominated government bonds instead of Treasuries fell 13 basis points, or 0.13 percentage point, last week to 199, according to JPMorgan Chase & Co. indexes.
The cost of protecting Brazilian bonds against default for five years dropped 7 basis points to 117, according to CMA DataVision prices. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.
Yields on the interbank rate futures contract due in January held at 10.66 percent last week, indicating traders expect the central bank will keep its benchmark rate at 10.75 percent through year-end.
Petrobras Sale
Central bankers have held two auctions to buy dollars in the foreign-exchange market each day since Sept. 8 as investment poured in ahead of the Petrobras sale this month.
Petrobras plans to pay the government about $42.5 billion in shares for the rights to develop 5 billion barrels of oil reserves. The company plans to offer as much as $35.5 billion of stock to minority investors, including additional allotments.
The central bank bought $18.6 billion in the foreign- exchange market in the first eight months of the year, up from the $7.3 billion it purchased in the year-earlier period, according to the bank’s website.
Economists expect the real to weaken to 1.75 per U.S. dollar by year end, compared with a 1.80 per U.S. dollar forecast four weeks earlier, according to the median estimate in a Sept. 17 central bank survey of about 100 economists published today.
“The central bank will continue to drain dollars in the market, as they are doing,” said Francisco Carvalho, head of currency trading at Liquidez. “They are buying $1 billion a day. If the unbalances continues after the Petrobras share sale, they may” step into the futures market, he said.
To contact the reporters on this story: Andre Soliani in Brasilia at asoliani@bloomberg.net
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