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Brazil debt crisis hits markets

Brazilian traders watch as stocks stumble over concern for the country's huge debt
Brazilian traders watch as stocks stumble over concern for the country's huge debt  

SAO PAULO, Brazil (CNN) -- Latin America's largest economy is facing economic crisis as it heads toward a national election weighed down by staggering debt and a plunging currency.

With the Brazilian real at record lows against the U.S. dollar and a national debt of almost $250 billion, fears are mounting that the country could follow Argentina into default.

Those concerns grew over the weekend after Fitch Ratings lowered its rating on the country's debt and Moody's Investors Service revised its rating outlook to negative.

That prompted Brazil's left-wing presidential candidate, who is leading in the polls, to attempt to clarify his economic programme, which has drawn criticism for lacking in commitment to resolve the debt crisis.

Luiz Inacio Lula da Silva, who heads Brazil's Workers Party (PT), pledged in an statement at the weekend "to stop our internal debt from increasing and from destroying confidence in the government's capacity to honour its commitments.

"This is a crisis of confidence in the country's economic situation, for which the current government is primarily responsible," he said. "We are conscious of the seriousness of the economic crisis. To resolve it, the PT is ready to negotiate with all segments of society and with the government."

But critics say that while Lula's comments may calm financial markets -- and help him win the October election -- he plans for dealing with the debt problem remain vague.

Lula is running against former health minister Jose Serra to replace current president Fernando Henrique CardosoBrnist.

Peter West, a strategist at Spanish bank Banco Bilbao Vizcaya Argentaria, told CNN that Lula, who has run unsuccessfully in three previous elections, "is still trapped in the past."

He said there is "no turning back the clock" on the government plans to reduce the debt and defend it currency.

Last summer, the International Monetary Fund launched a programme to support Brazil and last week the government received $10 billion in IMF funding to help bridge its finances.

The country also has about $3 billion to defend the real, which was created in 1994. It closed on Friday at an all-time low of 2.84 against the dollar. It's previous low was 2.838, just after the September 11 attacks in the U.S.

The Sao Paulo Stock Exchange's Bovespa index slumped 4.81 percent to 10,383.6, nearly one-quarter below where it began 2002 and at levels not seen since mid-October.

Finance Minister Pedro Malan said on Friday the two-month selloff in financial markets were overblown, given that the country's fundamentals did not justify current risk levels.

"We are, yes, going through a moment of [electoral] anxiety, but that is part of a herd mentality," he said. "People think it is better to follow the herd than being wrong on their own."

BBVA's West said Brazil's was suffering from a "delayed impact" of Argentina's debt default, but added: "The main problems are homegrown."

But he said those debt and currency problems "hopefully will prove to be a storm that passes."


• Brazil currency hits the bottom
Jun. 21, 2002
• Bovespa dips, IPC rises
Apr. 26, 2002

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