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IMF loans $30 billion to Brazil

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The International Monetary Fund agreed to loan Brazil $30 billion, in a decision that analysts around the world say will have far-reaching implications beyond just bailing out the country from its economic troubles.

The aid package, which was much larger than the $20 billion that analysts had expected and the IMF's largest-ever loan, is aimed at preventing the meltdown of the region's biggest economy and one where the U.S. has massive investments. U.S. banks alone have more than $25 billion worth of exposure in Brazil.

Win Thin, president of the research firm Mndalay Advisors said, "The IMF gives Brazil a big $30 billion package, signaling that despite comments to the contrary, the U.S. will ultimately stand behind the IMF aid to (emerging) countries in crisis."

The biggest part of the plan calls for a drastic reduction in Brazil's net foreign currency reserves floor to $5 billion from $15 billion. That will allow the central bank to spend an additional $10 billion of its net foreign currency reserves to protect the real currency.

The money didn't come without strings. Much of it, 80%, will be released in 2003 and will depend on whether Brazil adheres to economic targets set by the IMF such as a primary surplus target of at least 3.75% of economic output per year.

The Brazilian real has lost a third of its value this year as a result of fears that the country may renege on its massive $264 billion public debt if left-wing candidate Luiz Da Silva comes into office in October.

The funds will likely help prospects of ruling party candidate Jose Serra who is trailing badly behind in a four-way presidential race.

IMF loan bullish for countries with Brazilian exposure

The IMF's decision has had a major impact on foreign equity markets where larger banks had exposure to the Brazilian economy.

In Europe, France's CAC 40 is gaining 2.7%, Germany's DAX is up 3.13%, the Netherlands AEX General rose 4.02%, Spain's Madrid General jumped 4.43%, while the UK's FTSE 100 gained 2.21%.

The markets in the "Americas" (Argentina, Brazil, Canada, Chile, Mexico, Peru, Venezuela and United States) have not opened yet, but stock futures here in the U.S. are higher as the S&P 500 futures gain 7 points to 883, NASDAQ futures are up 5 at 924 and Dow futures are higher by 75 at 8,515.

Fair value for the S&P 500 today is $0.64. That price will not change during the day. HL Camp & Company has their computers set for program buying at $2.14 and set for selling at $-1.84. If traders would like to watch for these levels to execute, the q- charts symbol is $PREM. Other services may use the symbols @prem, prem.x, $sps, and $spinx. Fair value for the NASDAQ-100 today is $2.30.

Stock futures were higher before this morning's U.S. economic data, but have pulled back from their best levels of the early morning.

This morning's Producer Price Index (PPI) showed prices fell at the producer level by -0.2% in July, which was lower than the +0.1% gain forecasted by economists. Price increases for commodities such as chemicals, cotton and gasoline were offset by declines in foods and capital goods such as light trucks, cars and communications equipment.

The PPI index has fallen 1.1% in the last 12 months, and hints that there is very little pricing pressure. It is perhaps this reason that stock futures pulled back after the release of the PPI.

The core PPI, which excludes sometimes-volatile food and energy prices, fell -0.3% in July.

Energy costs rose just 0.1% in July after no change in June. The 2.2% gain in gasoline costs was offset by the 0.4% drop in residential natural gas prices. Heating oil rose 6%.

Jeff Bailey
Senior Market Technician
Option Investor

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