Download 1 Evolution of financial markets

Financial Stability Report
November 2002
1 Evolution of financial markets
1.1 International financial market
1.1.1 Introduction
In the period extending from early 2001 to the midpoint of the
following year, the international financial system was subjected to a
rare sequence of highly adverse shocks that generated enormous
impacts on its structure, operations and profitability. Despite this,
when viewed as a whole, banking institutions in all parts of the world
demonstrated considerable resilience to the unfavorable scenario and
were not only profitable but managed to remain sufficiently
capitalized. This fact in itself was enough to ward off systemic events
in the majority of the different national markets. However, this does
not mean that localized banking crises did not occur, particularly in
Japan and Argentina.
The shocks faced by the international financial market originated in
the real sector of the economy, which was marked by a worldwide
recession in 2001 led by the United States, with very slow recovery
in the pace of economic growth forecast for this year and next.
Parallel to this, the period was marked by the end of the American
stock market bubble, in a process that rippled out from
telecommunications, media and technology companies (TMT) to the
rest of the market. The loss of financial wealth impacted business
capitalization, banking guaranties, indebtedness levels and
consumption trends.
Among other negative factors, mention should be made of accounting
frauds followed by bankruptcies and debt composition agreements
involving large United States corporations. The announcements were
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Financial Stability Report
November 2002
made in the context of an already depressed market and provoked
highly negative impacts on investor confidence in corporate
information and in regulatory agencies and, consequently, on their
willingness to invest. Investments were further discouraged by a
steady stream of announcements of lower-than-expected profit levels,
pushing United States stock market indices to record lows.
The impact of the financial environment in the industrialized countries
on the so-called emerging economies, particularly in Latin America,
was evident in the downturn in net voluntary private capital flows
and in the sharp increase in loan spreads. The localized downturn in
international credits generated greater risk aversion on the part of
foreign investors and cutbacks in exposure levels in what are termed
high risk countries. Basically, this movement was caused by the
demands of prudential regulations and national supervisory entities.
Finally, one should cite the negative impacts on the international
growth outlook caused by rising tensions between the United States
and Great Britain, on the one hand, and Iraq, on the other, as evinced
in the recent upturn in the per barrel spot and futures prices of
petroleum.
1.1.2 Recent international financial market
evolution
The current scenario and outlook for the international financial
market indicate a process of deterioration in the early part of the
year. The unfavorable scenario was particularly evident in the
downturn in net private capital inflows to the emerging economies
and in financing operations with below investment grade debtors.
The outlook for the international capital market during the remainder
of this year and next year indicates low levels of global liquidity and
lesser access to financing for adversely rated debtors. From the point
of view of recovery of capital flows to emerging markets, a factor of
decisive importance will be the still uncertain reduction in risk
aversion among international investors and this, in turn, will certainly
depend on a rise in their confidence levels, cutbacks in the risk
exposure of their balance sheets and investment portfolios and
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Financial Stability Report
November 2002
continued implementation or adoption of solid and sustainable
economic policies in the countries targeted for capital investments.
Net capital flows to developing countries
With regard to projections of international capital
flows to the developing countries, these forecasts
Itemization
2000
2001 2002* 2003*
have been substantially revised to reflect the
Total capital flows, net
26.7
46.4
66.0
71.9
Latin America
45.1
43.9
26.1
41.1
deteriorating world economic scene. According
Net oficial flows
10.7
38.0
37.4
34.0
to the April and September 2002 IMF World
Latin America
-3.5
21.1
15.8
14.6
Economic Outlook (WEO), total net capital flows
Net private flows
16.1
8.3
28.6
37.9
Latin America
48.6
22.8
10.3
26.5
to these countries are expected to be less than
Direct investment, net
129.9 147.3 115.5 121.8
originally expected both in the current year and
Latin America
64.7
66.9
40.4
45.6
next year. For 2002, projections were revised
Private portfolio investment, net
-17.9 -51.2 -12.8
-9.4
Latin America
4.7
-2.2
1.0
7.6
downward from US$83.9 billion to US$66 billion
Other private flows, net
-96.0 -87.5 -74.1 -74.5
and, for the following year, from US$85.2 billion
Latin America
-20.8 -41.9 -31.1 -26.7
to US$71.9 billion. In the cases of Latin America
Source: IMF (World Economic Outlook - September 2002)
and the Caribbean, the revised figures moved from
* Forecast.
US$49.5 billion to US$26.1 billion and from
US$47.6 billion to US$41.1 billion in 2002 and 2003, respectively.
US$ billion
The evolution of the international financial market can be noted in the
figures released by the Bank for International Settlements (BIS)1 . In
the second quarter of this year, international banking assets abroad –
encompassing bank assets in countries different from that of the
institution’s home offices plus the assets of their branches abroad,
including those maintained with local residents in local currency –
registered a slight 1.5% rise, after being adjusted for the effects of the
dollar rate of exchange in relation to the currencies in which the loans
were referenced. While the developing countries of Asia, Europe,
Africa and the Middle East turned in growth in their international
loan stocks, Latin America closed with a negative result as a
consequence of increased perception of risk in the region and the
statistical impact of second quarter depreciation of local currencies,
particularly in Brazil and Mexico. Though it does not represent an
effective cutback in credit lines or reduction in the rolling of matured
operations, this latter effect does, in any case, reflect a situation of
lesser exposure in the balance sheets of international banks.
1/ BIS Consolidated Banking Statistics for the Second Quarter of 2002, released on October 23.
See http://www.bis.org/statistics/index.htm.
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Financial Stability Report
November 2002
1/
The stock of international banking assets held in
Latin America came to US$491.9 billion at the end
2/
2/
Europe
Asia
Brazil
All
Developing Latin
Period
of the second quarter of 2002, reflecting a
countries countries America &
Caribbean
reduction of US$36.2 billion (6.9%) in comparison
2001 I
11 315,5
1 289,9
518.1 388.2
239.3 136.2
to the previous quarter, and to US$70.4 billion
II 11 190,9
1 285,6
521.9 375.0
245.9 139.9
(12.5%), when viewed against the end of 2001.
III 11 577.2
1 332.4
558.4 375.1
256.0 138.5
With this result, the region’s participation in total
IV 11 497.5
1 357.4
562.3 376.6
275.8 142.4
banking assets held in developing countries
2002 I
11 464.6
1 327.6
528.1 387.7
270.6 134.9
dropped from 39.8% and 41.4% to 36.9% in the
II 12 419.3
1 333.3
491.9 395.3
293.4 123.9
same periods. Among the countries of the region,
Source: BIS (BIS Consolidated Banking Statistics)
1/ Cross-border assets plus the assets of foreign banks´ affilliates.
the sharpest drop in international credits in 2002
2/ Developing countries.
occurred in Argentina (US$31.8 billion, 43%) due
to accounting write-offs, the banking system’s shift to the peso and
cutbacks in exposure levels.
Cross-vorder banking assets
US$ billion
The stock of international banking assets in Brazil came to US$123.9
billion in June 2002, for a reduction of US$18.5 billion, or 13% in
the year. Viewed in terms of final risk maintained in Brazil, BIS
highlights the concentration of this position in the banking sectors
of the United States, Spain and Holland which, taken together,
account for 54.5% of total loans to the country. It should also be
noted that individual exposure levels represent 0.5%, 1.5% and 0.9%
of the total international assets of each of the national banking systems
in the order cited above.
At the same time, prudential regulation in the banking sector may
well be influencing the cutback in international loans. The need for
considering and estimating, ex-ante, the risks involved in each
operation for the purpose of defining the level of provisions in the
balance sheets of banks, results in a situation in which the regulations
may take on pro-cyclical characteristics, in seeking to protect the
equity situation of each institution. This is due to the fact that
constitution of provisions has a direct negative impact on capital
since it reduces the institution’s Basel capital ratio and, in more
extreme circumstances, may force the institution to capitalize or
reduce its higher risk assets. However, one should certainly stress
the positive effects of regulations on banking systems, particularly
in light of the fact that they have been able to withstand the current
process of economic downturn and remain fundamentally healthy.
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Financial Stability Report
November 2002
Parallel to the lesser volume of credit operations, this deterioration
is also evident in increased spreads, both for investment grade
companies in certain sectors, including the financial sector, as
confirmed by BIS, and companies below investment grade that are
trying to cope with more difficult conditions of access to financing.
The emerging countries, particularly those in Latin America, have
been seriously impacted by these liquidity restrictions.
Recent stock market evolution in the major industrialized countries
has been resoundingly negative. In the 1990s, stock markets moved
sharply upward, particularly in the sector classified within the socalled “new economy”. The performance of the variable income
market was important to that growth to the extent that it made it
possible to achieve across-the-board expansion in financing, with
particularly positive impacts on new projects as initial public offers
expanded. At the same time, this performance also stimulated growth
in consumer spending, as a result of the wealth effect.
Starting in mid-2000, however, the speculative bubble burst and,
since that time, markets have been characterized by a long and
accentuated decline in the indices and capitalization levels of the
companies listed. Among the causes indicated for this performance,
mention should be made of the slow recovery registered in the
industrialized economies in the wake of the 2001 recession;
accounting frauds in major corporations that have clearly undermined
investor confidence; successive announcements of lower-thanexpected profits and cutbacks in dividends to be paid; and increased
volatility of indices in a framework of growing aversion to risk. Taken
together, all of these factors contributed to an increase in demand
for fixed income papers and help to explain the recent drop in earnings
on ten year United States government papers.
In 2002, despite the fact that United States stock markets registered
highs in February, May and August, the Dow Jones, Standard and
Poor’s (S&P) 500 and National Association of Securities Dealers
Automated Quotations (Nasdaq) indices registered losses between
26% and 43% in the year up to the end of September, as the Dow
Jones closed the month below 8,000 points and the Nasdaq index at
1,172 points. In relation to the historical highs of these indices in
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Financial Stability Report
November 2002
Stock exchanges - USA
early 2000, the reduction in the value of open
capital corporations measured by the major
indices came to 35.2% for the Dow Jones, 46.6%
according to S&P 500 and 76.8% for Nasdaq.
1.4.2002=100
110
100
90
80
70
60
50
1.8
2002
3.1
4.23
6.19
Dow Jones
8.7
S&P 500
9.30
Nasdaq
Source: Bloomberg
Market capitalization - USA
US$ trillion
15
12
9
6
The negative performance of stock market indices
has a direct impact on the capital base of the
companies listed. In the case of nonfinancial
companies, the reduction in their market value
can represent the need for strengthening the
guaranties offered in credit operation or, in more
extreme cases, restrictions on their access to
credit. For banks, this loss may well demand
additional capitalization or reductions in the risk
level of their funding operations to meet the
demands of prudential regulations. The joint
capitalization of the New York Stock Exchange
(NYSE) and Nasdaq, which had come to US$18.2
trillion in September 2000, dropped to US$11.3
trillion in September of this year, reflecting a drop
of US$3.1 trillion in the current year alone.
3
0
Jan
2002
Feb
Mar
Apr
May
Jun
NYSE
Jul
Aug
Sep
Nasdaq
Source: Bloomberg
Market capitalization USA
US$ trillion
19
18.23
18
17
16
15
14
13
12
11.31
11
Jan
1999
May
Sep
Source: Bloomberg
16
Jan
2000
May
Sep
Jan
2001
May
Sep
Jan
2002
May
Sep
The stock indices that measure the performance
of European and Japanese markets performed in
a manner similar to the United States. The
Financial Times Securities Exchange Index (FTSE
100), which is used as the London exchange
index, registered a reduction of 30.1% in the
current year, while the Deutscher Aktienindex
(DAX), which is the index used at the Frankfurt
market, declined by 47.9%. The Nikkei index,
used in Tokyo, also turned in a negative growth
performance, with a loss of 13.7% in the year up
to September. When the figures for the end of
September 2002 for these three stock indices are
compared to their highpoints in early 1999, the
result points to falloffs of 46.3%, 65.7% and 55%,
respectively.
Financial Stability Report
November 2002
Stock exchanges - Europe and Japan
In the exchange market, the dollar declined,
particularly as of March. In mid-July, the dollar
reached maximum depreciation in the year, with
1.0117 dollars/euro and 115.81 yens/dollar, for
reductions of 13.7% and 12% in the same order
compared to the start of the year. Though the
United States currency did register some degree
of recovery in the following period, at the end of
September accumulated depreciation still totaled
10.9% in relation to the euro and 7.5% in relation
to the yen.
1.4.2002 = 100
120
110
100
90
80
70
60
50
1.7
2.14
3.24
5.1
FTSE 100
6.8
7.16
DAX
8.23
9.30
Nikkey 225
Source: Bloomberg
Depreciation of the dollar is a consequence of deteriorating
expectations regarding economic recovery and the performance of
financial markets, which had been seriously undermined by the
scandals provoked by successive announcements of accounting fraud.
In this framework, marked as it is by uncertainties regarding the
pace and structure of the adjustment of foreign accounts in the United
States, the deficit in the current accounts balance, expressed as a
percentage of GDP, came to 5.01% in the second quarter of this
year and has been expanding since the third quarter of 2001.
US dollar exchange rates
Dollar/Euro
1/
Yen/Dollar
100
1.05
1.00
110
0.95
120
0.90
130
0.85
0.80
1.4
2000
6.16
11.30
Euro
Source: Bloomberg
1/ Reversed scale.
5.16
2001
10.30
4.15
2002
Yen
140
9.27
However, more recent evolution suggests that
external adjustments must be more gradual and
ordered, without generating excessive impacts on
world financial stability. These expectations
incorporate maintenance of United States
financial assets as the risk benchmark for the
world, permanence of the dollar as the
international currency for financial and trade
operations and, at the same time, the very limited
economic growth dynamics of the economies of
the major countries that could compete with the
United States in attracting investments.
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Financial Stability Report
November 2002
1.1.3 Financial institutions
The impact of the adverse international financial climate on banks
has been limited. Taken as a whole, financial institutions in the United
States and Europe remain solid, with adequate levels of capitalization
and positive profitability, though they have been impacted by
domestic and foreign losses. The most probable outlook for financial
institutions is continued systemic solidity, though several specific
countries have had to cope with banking crises.
Number of "problem" banks - USA
In the case of the United States the market value
of banks has dropped sharply as a result of
involvement in accounting frauds or exposure to
400
companies that have had to restructure their
debts, at the same time in which the industry itself
300
has been hard hit by the recession. However,
200
despite all this, the sector has registered
increasingly larger quarterly profits since the third
100
quarter of 2001, according to the Federal Deposit
Insurance Corporation (FDIC). In the second
0
Dec
Dec
Dec
Dec
Jun
Dec
Jun
Dec
Jun
quarter of the current year, net profits of
1993
1995
1997
1999
2000
2001
2002
commercial banks came to US$23.4 billion, the
Source: FDIC, FDIC Quarterly Banking Profile, First Quarter 2002
highest level of the historic quarterly series.
Despite this result, the number and volume of
bank’s assets facing problems has increased. The number of
commercial banks classified as problematic hit the mark of 115 in
June, the highest level since the end of 1996. Parallel to this, the
Assets of "problem" banks - USA
assets of these institutions have been stable since
US$ billion
250
December 2001, reaching a level of US$36 billion,
the highest mark since 1994. In relation to the
200
dimensions of the United States commercial
banking network guarantied by the FDIC, the
150
number of problem banks is equivalent to 1.4%
100
and their assets to 0.5%.
500
50
0
Dec
1993
Dec
1995
Dec
1997
Dec
1999
Jun
2000
Dec
Jun
2001
Source: FDIC, FDIC Quarterly Banking Profile, First Quarter 2002
18
Dec
Jun
2002
Insofar as bank investments in the United States
are concerned, the annual report known as Shared
National Credit Program, which was released on
October 8 by the Board of Governors of the
Financial Stability Report
November 2002
Sindicated loans - USA
US$ billion
Total
Adversely
250
2,100
200
1,800
150
1,500
100
1,200
900
50
0
1992
1994
1996
Adversely rated loans
1998
2000
600
2002
Total committed
Source: Fed, FDIC and OCC
Adversely rated loans - USA
% of total loans
16
16.0
12.6
12
8
4
0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Source: Fed, FDIC and OCC
Federal Reserve System (Fed), FDIC and Office
of the Comptroller of the Currency (OCC) and
compiles and analyzes information on sindicated
loan operations above US$20 million, indicated
an ongoing process of deterioration in the quality
of loans. In June, the data base encompassed loans
totaling US$1.9 trillion or 18% of GDP, reflecting
a reduction of 8.7% compared to 2001 and
involving more than 9 thousand operations for
5.5 thousand clients. Of this total, US$236 billion,
or 12.6%, were adversely rated, including credits
with effective and potential difficulties, registering
growth of US$43.3 billion in relation to the result
for the previous year which, in turn, had already
grown by US$93.1 billion in comparison to 2000.
The overall growth of these loans and of the
adversely rated operations seems to follow the
evolution of the nation’s macroeconomic situation
rather closely. Three distinct moments can be
distinguished. The first extending up to 1998,
marked by sharp credit growth, coupled with a
decline in adversely rated operations. In the
period up to 2001, loan growth decelerated and
adversely rated credits increased rapidly, possibly
as a result of a certain attenuation of the criteria
applied in the previous period. Finally, in 2002,
total loans dropped, further increasing the
proportion of problem credits.
In Europe, banks with stock holdings or high levels of exposure in
companies/sectors involved in telecommunications, media and
technology and those institutions following an international growth
policy targeted to Latin America were the hardest hit. For example,
Banco de España required – and the nation’s banks complied with
the demand - full provisioning of the investments made by Spanish
banks in Argentina.
19
Financial Stability Report
November 2002
In Japan, the problem of matured and unpaid loans was further
aggravated by deficiencies in corporate governance. This has become
the major economic concern of that country. The expansionary fiscal
policy followed in the 1990s also aided in postponing a definitive
solution to the problem by providing support to such industrial
sectors as construction, real estate and nonbanking financial services,
precisely the major sources of poor quality loans in Japan.
As of April 1, 2001, Japanese banks, which had previously recorded
their assets at their historic value, had to shift into the system that
forces them to review their balance sheets and adopt a marked-tomarket methodology. Obviously, this resulted in even greater losses
given the low value of these stocks.
Currently, the Japanese banking system accumulates a total of ¥52.4
trillion (US$428 billion) in matured and unpaid loans. Evidently, this
has had a strong impact on credit flows. In order to introduce greater
dynamics into its credit system, the Bank of Japan opted to adopted
the strategy used in Hong Kong in 1988 and utilize part of its external
reserves of US$456 billion to acquire approximately US$200 billion
in stocks directly from banks. This decision represents one more
attempt to reduce the losses generated by declining stock prices since,
to the extent that the market index drops, banks become more
reluctant to write-off matured and unpaid loans.
Under the impact of the prolonged economic and political crisis that
has held the economy in a state of stagnation, the Argentine banking
system has had to cope with an increasingly grave situation. Starting
in 2001, the worsening economic scenario generated a crisis of
confidence in the system that resulted, in turn, in an outflow of
deposits over the course of the year and, in December, obligated the
government to adopt a series of severe restrictions on bank
withdrawals. The end of the system of currency convertibility in early
2002 and adoption of asymmetric rules for conversion of bank assets
and liabilities into local currency, justified by the high degree of the
population’s indebtedness in foreign currency, further aggravated
the situation and provoked accentuated equity distortions in financial
institutions.
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Financial Stability Report
November 2002
1.2 National financial market
Aside from the factors already analyzed in the evaluation of the
international financial market, the behavior of the domestic market
over the course of 2002 was also impacted by the uncertainties of
the electoral process. Increased perceptions of public sector credit
risk, the downturn in the volume of foreign capital inflows,
uncertainties surrounding the financing of the balance of payments
and increased risk aversion on the part of investors produced
considerable local market instability, coupled with alterations in
domestic asset prices.
Notwithstanding this turbulence, the financial market followed a
relatively tranquil trajectory marked by increasingly higher levels of
confidence up to the month of March 2002, following a period of
extreme volatility in the second and third quarters of 2001 which
reached a peak in the wake of the events of September 11.
The economic policy measures adopted by the government in the
second half of 2001 were of fundamental importance to the stability
that marked the early part of the year. Among these, mention should
be made of the signing of the IMF agreement, the increase in the
target for the fiscal surplus, Banco Central’s policy of daily exchange
market interventions, placements of exchange securities, high
compulsory reserve levels and increased capital requirements for
exchange exposure. Another factor of importance was the reversal
in the expectations that had generated the excessive pessimism of
mid-2001 or, in other words, better perception on the part of market
agents of balance of payments financing conditions and the clear
differences between the Brazilian and Argentine situations.
In this sense, the period between November 2001 and March 2002
was marked by upward movement in the rate of exchange, declines
in the level of the Brazil risk and recovery in Ibovespa. The more
positive macroeconomic situation and the projected decline in
inflation made it possible to achieve consecutive 25 base point
reductions in the basic interest rate target, as defined by Copom in
its February and March meetings.
21
Financial Stability Report
November 2002
Exchange rate
At the end of February, Banco Central announced
exchange swap operations as a complement to
sales of exchange securities. This measure was
taken in light of the possibility of difficulties in
rolling the debt in the second half of the year, in
the context of a financial market characterized
by severe uncertainties. These auctions began
toward the end of March and, initially, were
combined with National Treasury LFT offers.
R$/US$
3.5
3.3
3.1
2.9
2.7
2.5
2.3
2.1
1.9
Jan Feb Apr May Jul
2001
Aug Oct Nov Jan Mar Apr Jun
2002
Jul
Sep
Embi Brazil
Points
2,500
2,250
2,000
1,750
1,500
With this new instrument, Banco Central sought
to repeat the sale of exchange securities with the
added advantage of offering two instruments
instead of just one (exchange swap + LFT versus
NTN-D), thus making it possible for the market
to negotiate them separately and more effectively.
The new system made it possible to individually
price the risk of exchange growth, of the exchange
coupon and LFT, thus stimulating a drop in the
premiums demanded in the auctions.
1,250
1,000
750
500
Jan Feb Apr May Jul
2001
Aug Oct Nov Jan Mar Apr Jun
2002
Jul
Sep
Source: Bloomberg
Bovespa Index
Points
19,000
17,000
The exchange swap auction was also viewed as a
way of avoiding the turbulence that had been observed
in the exchange coupon curve, while preventing
secondary and undesirable impacts on monetary
policy implementation. Starting in May, Banco
Central initiated direct placements of exchange swaps
with no ties to LFT purchases. This was seen as a
way of facilitating the rolling of the market exchange
hedge in an environment of growing difficulties for
sales of public debt securities.
15,000
13,000
11,000
9,000
Mar
2001
May
Source: Bovespa
22
Jul
Sep
Nov
Jan
2002
Apr
Jun
Aug
Sep
The National Treasury’s strategy for the internal
securities debt in the period was concentrated in
issues of preset papers (LTN) and was able to
take advantage of the low differential between
the Selic rate and the long-term interest rate. The
interest curve registered the same negative
inclination in some periods. The reason for this
Financial Stability Report
November 2002
was the expectation that the Selic rate target would be reduced in a
more aggressive manner due to perceptions of an absence of
aggregate demand pressures and Banco Central’s position that
monetary policy would be analyzed over longer time periods to verify
compliance with inflation targets. As a matter of fact, the participation
of preset papers in the federal public securities debt moved from
7.8% in December 2001 to 9.8% in April 2002.
Interest rates growth
One-day Selic rate and swap of 1 month, 6 months
and 1 year
Yield (%)
32
30
28
26
24
22
20
18
16
14
Jan Feb
2001
Apr
Jun
Aug Sep
One-day Selic
Nov
1 month
Jan Mar
2002
Apr
Jun
6 months
Aug Sep
1 year
Source: BM&F and Bacen
Federal domestic public debt1/
Share by index
R$ billion
Period
Prefixed
Value
Selic
Price
Exchange Other
rate
index
rate
% Value
% Value % Value
Total
% Value % Value
1999 Dec
40
9.0 252 57.0 25
5.6 101 22.8
25 5.6 441
2000 Dec
75 14.8 267 52.2 30
5.9 114 22.3
24 4.8 511
2001 May
75 14.1 269 50.1 38
7.1 129 24.1
25 4.6 536
Jun
63 10.8 292 50.2 42
7.2 156 26.8
29 5.0 581
Sep
57
9.1 310 49.3 42
6.6 197 31.4
23 3.6 629
Dec
49
7.8 329 52.8 44
7.0 179 28.6
24 3.8 624
2002 Jan
48
7.6 334 52.6 51
8.1 186 29.4
15 2.4 635
Feb
47
7.5 333 52.7 54
8.6 181 28.7
16 2.5 632
Mar
57
9.1 320 51.2 54
8.6 180 28.7
15 2.4 626
Apr
62
9.8 317 50.1 56
8.9 183 28.8
15 2.4 633
May
61
9.5 313 48.9 57
8.9 194 30.3
15 2.3 639
Jun
56
8.6 308 47.1 58
8.9 217 33.2
15 2.3 654
Jul
52
7.7 300 44.5 61
9.0 250 37.0
13 1.9 674
Aug
48
7.7 283 45.4 61
9.9 218 35.0
13 2.0 623
Sep
43
6.5 272 41.3 63
9.6 268 40.7
13 1.9 659
1/ Held by the public
With regard to the debt indexed to the Selic rate,
LFT placements were suspended in the period
from October 2001 to January 2002 and their
participation in total debt dropped to about 50%
in April. To some extent, the upward movement
in the rate of exchange generated a reduction –
albeit moderate – in the stock of the exchange
debt. It should be noted that this debt had
increased by R$64.8 billion over the course of
2001, reflecting exchange depreciation and net
issues of R$28.1 billion in exchange securities,
mostly to meet growing demand for hedging.
Starting in the month of April, uncertainties
regarding the macroeconomic policies of the new
federal administration coupled with a worsening
external scenario, led to upward movement in the
level of the Brazil risk, exchange depreciation and
lower stock prices. The Embi Brazil moved from
about 700 base points to 2,400 base points in the
period from March to September. In the same
period, the rate of exchange depreciated by 40%
and Ibovespa dropped by 35%.
The increase in perceptions of public sector credit
risk and financial market tensions were also
evident in the process of devaluation and the high
volatility of public securities in general. Discounts
in LFT prices followed an upward curve, reaching
a peak of 2.75% in August 2002. In this
environment of declining public security prices,
23
Financial Stability Report
November 2002
the CVM and Banco Central recommendation that investment funds
comply with the obligation of marking-to-market, as regulated in
1996, provoked a wide ranging process of recomposition of the
portfolios of domestic investors, with migration from investment
funds into savings deposits, time deposits and even demand deposits.
The exchange coupon curve rose sharply and reflected the less
favorable scenario evident as of May. Starting in July, the curve turned
negative mostly as a result of a shortage of dollars on the spot market,
of the rolling of the mostly short-term exchange debt and low liquidity
in the long segment of the curve, due to the reduced maneuvering
space available to financial institutions to assume risk.
LFT market price - Discount
Yield (%)
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Jan
2002
Feb
Apr
10.16.2002
6.15.2005
May
Jul
6.18.2003
6.14.2006
Sep
6.16.2004
Source: Andima
US dollar yield
Rate % p.y.
In order to stabilize this situation, Banco Central
carried out an unprecedented number of public
security purchase and exchange operations, aimed
at reducing the average term of the LFT held by
the market and reverse the process of growing
discounts in the prices of these papers. Long-term
LFT were exchanged for LFT with maturities in
2002 and 2003 were made, together with a series
of purchase options. In order to neutralize the
monetary impact of the security purchase program,
Banco Central adopted an August increase of 3
p.p. in compulsory reserve rates on demand
deposits and time deposits, and 5 p.p. on savings
accounts. It should be noted that, in June, Banco
Central had already raised compulsory reserve rates
on time deposits and savings deposits by 5 p.p.
65
55
45
35
25
15
5
1 year
2 years
3 years
5 years
4 years
6 years
-5
2
250
1.18.2002
Source: BM&F and Bacen
24
498
6.17.2002
746
994
8.30.2002
1,242
9.30.2002
Furthermore, Banco Central carried out NBCE
and NTN-D exchanges for exchange swaps and
LFT without altering the risk exposure of
investment fund portfolios. These operations
made it possible to release a significant volume
of guaranty margins at BM&F through simple
offsetting of the asset and liability positions of
the stock funds, thus generating greater liquidity
and reducing the volatility of quotas.
Financial Stability Report
November 2002
With regard to primary security auctions, as of the month of May
Treasury operations were concentrated on short-term LTN offers in
amounts below the volume of maturities. With this, the internal
federal securities debt remained practically stable through the second
half of the year, despite the impact of exchange depreciation on the
stock of securities indexed to exchange. On the other hand, the
position of excess banking liquidity, expressed by the difference
between the volume of banking reserves and compulsory reserves
on time deposits, sterilized daily by the Banco Central open market
dealers desk, moved from R$5 billion at the end of April to R$27
billion, at the end of September.
1/
Though it has grown as a result of exchange
depreciation, the debt indexed to exchange
85
diminished when this effect is isolated. Thus, the
stock measured in dollars shrank from US$77
80
billion at the start of the year to US$68.8 billion
75
in September. Net redemptions of exchange
securities added up to R$28.5 billion in
70
accumulated terms for the year, or practically
65
equal to net 2001 placements of the same paper.
60
It is interesting to note that the performance of
Aug Sep Oct Nov Dec Jan Feb Mar Apr Jun Jul Aug Sep
2001
2002
demand for exchange papers in 2002 vis-a-vis the
Source: BM&F and Cetip
1/ Includes contracts registered at both the BM&F and Cetip.
previous year was precisely the opposite. Demand
for exchange hedge in the nonfinancial sector,
represented by still open exchange swap contracts at Cetip, turned
in a reduction of US$13.7 billion in 2002 up to the end of September,
compared to an increase of US$15 billion in 2001.
Exchange rate swap - OTC
Stock
US$ billion
The measures taken by the Banco Central and the Treasury made it
possible to stabilize discounts on public securities and reverse the
migration into investment funds. It is important to stress that, at
that point, monetary policy was facilitated by the preventive measures
taken in the 2000/2001 period, when an effort was made to lengthen
the term of the public securities debt, avoid debt maturities between
the final quarter of 2002 and the first quarter of 2003 and form a
liquidity cushion for the Treasury.
25
Financial Stability Report
November 2002
1.3 Conclusion
The current scenario and outlook for evolution of the international
financial market registered sharp deterioration over the course of
2002. To a great extent, the unfavorable environment is a result of
cutbacks in net inflows of private capital to the emerging economies,
particularly those located in Latin America, as well as restrictions
on access to financing on the part of below investment grade debtors.
Among the factors responsible for these new financial market
conditions, one could list the slow pace of world economic recovery,
particularly in the United States in the wake of the 2001 recession;
large scale corporate frauds involving multinational companies;
forecasts of lower business profits; reductions in business confidence
and, especially, in consumer confidence; and accentuated growth in
risk aversion on the part of investors. Taken as a whole, these factors
led to some degree of reduction in the liquidity conditions of the
international market.
International capital market forecasts project continuation of low
global liquidity and more difficult financing for adversely rated
debtors. There are other extra-economy risks that deserve mention,
such as the growing tensions that have marked ongoing conflicts in
the Middle East which, in turn, have exerted upward pressure on oil
prices.
Despite the adverse factors noted in 2001 and 2002, one should
highlight the absence of systemic banking crises in practically all
countries. In general, the solidity of national banking sectors, as
reflected in adequate levels of capitalization and profitability is due,
among other factors, to greater financial market diversification, with
a larger number of agents involved in assuming risks; improved
prudential regulations, with adoption of international standards by
an increasingly greater number of countries; and the current situation
of relative monetary policy stability in the major industrialized
countries. In the cases of Japan and Argentina, their banking crises
were fundamentally due to developments in their national economies
and to adoption of specific economic and sectoral policies.
26
Financial Stability Report
November 2002
With respect to the domestic financial market, performance has
showed adequate levels of solidity and profitability, despite the
influence of the highly adverse external situation, as evident in
reduced international liquidity and significant changes in the risk
perception of foreign investors. The use of monetary policy
instruments by Banco Central, including such new instruments as
exchange swaps, and more traditional ones, like compulsory reserves,
was decisive in overcoming the impacts of the volatilities that marked
the financial market in 2002. At the same time, both Banco Central
and the National Treasury took measures aimed at stabilizing
discounts on public security operations and reversing the migration
of resources out of investment funds.
27