US Financial Crisis: Decoupling and the Brazilian Economy



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Code : ECC0036

Year :
2009

Industry : Banking, Insurance and Financial Services

Region : Brazil

Teaching Note: Available

Structured Assignment : Available

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Impact of the US Financial Crisis on Brazil's Currency Derivatives On September 18th 2008, Lula declared financial crisis will bypass Brazil. On the topic of the impact of US financial crisis on Brazil, Lula opined Brazil was greatly insulated from the financial turmoil in US. He said, "People ask me about the crisis, and I answer, go ask Bush. It is his crisis, not mine." But 11 days later, on September 29th 2008, Lula backtracked and conceded that Brazil, after all, was not completely immune to the events happening in the US. In his weekly radio programme, he said, "A recessionary crisis in a country as important as the United States…can bring problems to all countries."

Impact of the US Crisis on the Brazilian Economy Tight credit, falling commodity prices and slow economic growth, which are the outcome of the US financial crisis, have the potential to damage the Brazilian economy. Brazil witnessed a rapid economic growth due to easy availability of credit during the 5-year period (2003–2008). Brazilian middle class boosted aggregate demand in the economy by spending on expensive things like cars and houses due to availability of easy credit. In the face of US financial crisis the biggest problem for Brazil is scarcity of credit...

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Will Brazil Decouple? Analysts believe that the falling exports to US should not cause a big problem for the Brazilian economy, as a study on the possible effects of US recession on Latin America, published by the Centre for Economic and Policy Research in Washington noted, "in 2007 trade with the United States represented less than 2%of the gross national products of Argentina and Brazil".18 Moreover, China is emerging as major importer of Brazilian commodities and by 2010, the Government of Brazil intends to triple exports to China.

Measures Taken by Brazil In October 2008, Central Bank chief Henrique Meirelles injected the markets with dollars, as real was losing its value. In the third week of October 2008, Central Bank declared its biggest intervention of "$50 billion programme of currency swaps designed to provide liquidity to a currency-futures market that had all but dried up for lack of dollars."26 The Finance Ministry also abolished, tax on financial transactions called as IOF, to stop the dollar outflow...


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