According to a recent report from BofA Merrill Lynch’s David Baker, it isn’t entirely surprising that Tombini has been aggressive in its recent interest rate cuts. He is clearly worried about growth, and it has to do with Europe and FDI.
“Europe is the largest origin of investment in Brazil. In 2011, total foreign direct investment from Europe totaled USD41.2bn, or 59.2% of total FDI (Chart 4). Between 1996 and 2011, average FDI originated from the old continent is 51.92% of total FDI.”
Spain is the second biggest European investor in Brazil, and the third biggest overall behind only the US and fellow eurozone-member the Netherlands. According to Euromoney, between 1996 and 2011 Spanish investments represented 10.4% of FDI. If the crisis intensifies then…
“If conditions in Spain deteriorate further and companies require more capital, Brazil could end up being the source for it. This could happen through higher profit and dividends outflows or actual sale of parts of those businesses in the country.”
Still according to the report, half of the European exposure is to Spanish banks, particularly Santander. Beker thinks that these banks are likely instigators of the aforementioned outflows from Brazil.
“This exposure data include the banks subsidiaries in the region and is a more comprehensive measure because financial troubles in the banking centers could lead them to take actions in the region, such as selling stakes, divesting operations or reducing risk assets to reduce capital needs once balance sheets are consolidated.”
Perhaps they are already “taking actions”…
Source: BofA ML, Euromoney