Although about half of the reserves are longer term government debt that will be stable in a financial crisis of some sort, the rest of the reserves can be extremely volatile. In fact, this volatility could be seen clearly this year between last July and October, when the BRL/USD almost touched 2.00 after a massive capital outflow. The CB then intervened and the FX stands at about 1.75 now. Brazil experienced such a scenario (in higher proportions) in 1998 when half of its foreign reserves evaporated in few days, which caused a huge currency devaluation and short-term interest hikes in excess of 40%. Of course, now the country’s financial situation is much better than in 1998 when Brazil’s CB had a huge net negative assets on its books.
The main point here is that the Brazilian government might be over-extending itself when it says it wants to aid Europe – these types of statements must always be taken with a grain of salt.
This article was written by Tom Elias exclusively to BrazilianBubble.com.
Mr. Elias is an investment professional and business consultant with 30-years of high-tech and manufacturing experience in Brazil and the U.S.
To contact him, please write an email to firstname.lastname@example.org