There's more bad news from Brazil.
Duff & Phelps Credit Rating Co. warned last week that the risk that Brazil's government might default on its local-currency obligations is increasing.
"The threat of a local-currency default is now quite high," said Jaime Sanz, director of Latin American ratings at Duff & Phelps.
Unless interest rates come down in Brazil, Mr. Sanz added, the country could be forced to reschedule its local-currency-denominated debt by midyear.
That could spell trouble for the global economy. When Russia unilaterally rescheduled its local-currency obligations last year, it triggered "a worldwide credit crunch that is still affecting global debt markets," Mr. Sanz said.
Meanwhile, Fitch IBCA, the New York- and London-based rating agency, cut Brazil's rating to B from B-plus this week amid heightened concern that the government will default on $154 billion of domestic debt.
Fitch noted that though Brazil is still not likely to default on either its domestic or external debt, "the risk of an adverse outcome has clearly increased."
A recent report by J.P. Morgan & Co. said Brazil's economy will decline more than expected this year as a currency devaluation and high interest rates push the economy into recession.
The Morgan analysis predicted that Brazil's economy would decline 5.5% this year, compared with a previous estimate of a 4.3% decline.
"This year's recession may prove steeper than previously expected," Morgan economist Marcelo Carvalho noted in the report.
Brazil's currency has plunged 38%, to 1.91 reals to the dollar, since the country first devalued on Jan. 13. The decline triggered speculation that Citigroup and BankBoston Corp., the two U.S. banking companies with local retail and commercial banking operations, would suffer setbacks.
Senior executives at both banks, however, recently emphasized that they do not expect Brazilian volatility to have any real impact on their 1999 earnings.
Other big U.S. banking companies in Brazil, such as Chase Manhattan Corp., BankAmerica Corp., and Morgan, have focused on corporate banking and capital markets-related activities. Executives at those banks have said they expect improved earnings as a result of volatility in Latin America.
The weaker currency makes it more expensive for Brazilian companies to repay dollar debt, forcing them to cut costs and put off expansion, Morgan said in its report.
Rising import prices, meanwhile, are expected to boost inflation to 9% this year, after a decline of 1.8% in 1998, according to the banking company. It added that the real should end the year at 1.7 to the dollar after a steep drop since Jan. 1.
