The International Monetary Fund's (IMF's) $30 billion (€31 billion) rescue package for Brazil received a positive welcome yesterday from financial markets with rises in the country's currency, and bonds and share prices of companies exposed to the South American economy.
Confidence was further boosted when the main candidates in Brazil's forthcoming presidential election offered their preliminary support for the package.
The Group of Seven (G7) large industrial countries also backed the loan.
Speaking on behalf of the G7, Mr John Manley, the Canadian finance minister, said: "We look forward to the presentation to the IMF board of the final agreement based on prudent fiscal and monetary policies and an overall economic programme that lays the basis for strong economic growth."
But although markets were buoyed, some analysts remained sceptical that Brazil could avoid a default on its $250 billion debt.
Policymakers hope that the strong display of support for Brazil will shore up confidence in Latin American economies.
Across the region, domestic currencies have been falling and interest rates on government debt rising, causing concern that the fallout from last year's default and devaluation in Argentina would finally spread.
Under the deal with the IMF, Brazil has committed to maintaining a budget surplus of 3.75 per cent of gross domestic product.
If the winner of October's election cannot meet that pledge, most of the credit would be forfeited, as 80 per cent of the funds have been deferred until 2003.
Mr Jose Serra, the government candidate and leading proponent of economic continuity, fully endorsed the agreement.
Mr Luiz Inacio Lula da Silva, of the left-wing Workers Party, also signalled his support in principle yesterday morning.
Mr Ciro Gomes, candidate of the centre-left Workers Front and second-placed in the polls, said prior to the announcement of the deal: "I would be the last to obstruct the negotiations between the government and the IMF."
Those words were enough to cheer investors. The Brazilian real increased by more than 5 per cent against the US dollar to R$2.87, breaking through the R$3 barrier for the first time since July 26th.
The average yield of Brazilian debt compared with US Treasuries fell by about two percentage points.
Companies with heavy exposures to Latin America saw large increases in their stock prices. The Spanish equity market closed up 5 per cent.
Not all reactions were positive, however. Some analysts thought the bail-out would merely prolong Brazil's agony before it suffered an inevitable default.
Brazil's economy has proved vulnerable to the global downturn and real interest rates are still too high to stop government debt rising as a share of gross domestic product.
According to Mr Walter Molano of BCP, a US securities group based in Connecticut: "The IMF package authorised the outgoing administration to strip clean the central bank vaults and leave the bill to the incoming team.
"The probability of default is now higher than it was before," Mr Molano added. - (Financial Times Service)
