Perfect Storm

Reader Lucas from Brazil writes about the "perfect storm."

Hello Mish

Brazilian interest rates are skyrocketing. Rates went up more than 2 percentage points in a month. Bond trading was suspended due to the quick devaluation.

Nobody is talking much about it, but energy corporation Petrobras is down 95% from the peak (in dollars). They have a high dollar exposure, and some estimates say that since June, Real devaluation alone was responsible for a +R$100B increase in debt.

Brazil's majors oil investments are in (really) deep water drilling, and they may be not worthy anymore. Petrobras debt is now equivalent to 8% of the whole country GDP.

And while. our president doesn't have support to do anything.

It's a perfect storm here.

Lucas

Petrobras

In classic bubble action, shares of Petrobas went from $4 to $77 back to $4. Executives no doubt, cashed out at every opportunity.

Brazil Real

The Brazilian Real went from 1.6 to the US dollar to 4.1 to the US dollar. That's a decline of about 54%.

Brazil 1-Year Government Bonds

Since 2007, the yield on 1-year Brazil government bonds went from just over 7% to over 16%.

Flashback March 2012

PLease note the inserts on the second two charts. I highlighted the March 2012 candle because that's when Brazil Declared New Currency War on US and Europe.

"When the real appreciates, it reduces our competitiveness. Exports are more expensive, imports are cheaper and it creates unfair competition for businesses in Brazil," said Guido Mantega, the finance minister who was the first to use the controversial term "currency war" in 2010.

President Dilma Rousseff later weighed in on the debate, vowing to defend Brazilian industry and stop developed countries' policies from causing the "cannibalisation" of emerging markets.

The move comes as Brazil's central bank also steps up direct intervention in the market, selling dollars and offering derivatives called reverse currency swaps to curb the real's near 9 per cent surge against the US dollar this year.

Be Careful of What You Wish

It was just a few short years ago that Brazil was bitching about the strength of the Real. Brazil got its wish.

More Intervention Madness

On Thursday, we learned Brazil Real Mounts Biggest Rally in 7 Years on Intervention Suggestions

The Brazilian Real rallied nearly five percent Thursday following statements by the country's central bank president, which stated that he will explore the use of foreign exchange (FX) reserves to defend the currency against persistent declines versus the US Dollar. Brazil Central Bank (BCB) President Alexandre Tombini mentioned that different options will be used to stabilize the currency. Options that may be employed include swap contracts and dollar repurchase agreements.

What If Intervention Fails?

On day proves nothing.

I have a simple question for Brazil: What if intervention fails?

If Brazil blows all of its reserves defending a pseudo-peg that cannot be maintained, it will find itself in very dire straits. Untenable currency prop jobs is the way to ruin.

Ask Argentina; Ask Russia; Ask China who recently tried and failed to prop up its stock market. Heck ask Switzerland who recently had to abandon its peg to the euro.

The only thing that will stabilize the Real is sound economic policy and a stable government.

Until then, there is no question. Intervention "will" fail.