Brazilian Debt Takes a Pounding
Price Hits 20 Cents as Hope Fades for Mexico-Style Pact
LONDON -- Banks, investors, and speculators lost many millions of dollars over the past week as the value of Brazilian foreign debt went into a tailspin, trading specialists said.
At one stage, the main Brazilian foreign loan facility quoted in the secondary market for Third World debt fell to about 20 cents on the dollar, half its value in September.
Debtholders were said to be nursing losses of as much as $100 million after the selloff, sparked by concerns over Brazil's economic outlook.
Wilhelm Naves, a debt-trading expert at NMB Bank of the Netherlands, said he was not surprised at the estimated loss. "Happily, we're not affected too badly at our bank, and it's not a problem," he said.
Bull Turns to Bear
The drop in Brazilian debt prices follows a yearlong bull market, spurred by hopes for a major debt-reduction agreement like Mexico's.
In recent years, an active market, estimated at $500 billion, has grown in the impaired debt of lesser-developed nations.
In September, Brazil's multiyear deposit facility agreement hit a record high of 40 cents on the dollar.
Since then, the market has drifted lower until the retreat "became a stampede" last week, said one specialist at a U.S. bank.
From a level of 29 cents on the dollar at the start of the week, Brazil's multiyear facility, a $42 billion issue, plunged to 20 cents before steadying at about 24.
This is equivalent to about an $8 billion reduction in the notional value of the deposit facility at the low point, specialists said.
Argentine Debt Affected
The trading panic spread to the debt of Argentina, which also has not yet agreed to a debt-reduction pact.
The nation's main facility fell as low as 27 cents from 41 cents and has since stabilized at around 34.
Brazil's debt plunge comes in the wake of a rapidly deteriorating economy, with a rekindling of inflationary forces - dashing hopes of a major debt-restructuring package, specialists said.
"A wide range of investors - banks, large U.S. pension funds, corporations, and private individuals - have been holding Brazilian debt amid optimism over a settlement," one specialist said.
But too many held on to the debt too long, he said, in hopes of converting their holdings into bonds under agreements similar to that signed by Mexico, in which U.S. Treasury Secretary Nicholas Brady coordinated the issue of special debt securities.
The most severe losses from the week's selloff, according to market participants, may be borne by "small, local brokerage firms" in Latin America.
These have been active players in the secondary market, often dealing on behalf of Latin American investors who have been repatriating funds from overseas because of perceived improvements in the region's prospects.
"Confidence [in Brazilian debt] has been dented very badly," one trader said.
Some Are Reducing Limits
Some major banks in the United States and Europe, which make up the main trading forces in LDC debt markets, are reducing their trading limits and the amount of capital they are committing to the business, several specialists said. They declined to name the institutions.
At several banks, prices in debt for Mexico, Venezuela, and other Latin nations were relatively unaffected by the selloff in Brazil.
"The worst might be over," said Frederico Eisler, specialist at Merrill Lynch & Co. in London.