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Brazil Retains Currency Float; Promises Congressional Reform

By Anthony Faiola
The Washington Post

Brazilian financial authorities said Monday they will make permanent last week's decision to allow the nation's currency, the real, to float on global markets. They added, however, that they will intervene to support the real if it appeared to be tumbling in value in the same manner as the Russian ruble did last summer.

President Fernando Henrique Cardoso and Senate President Antonio Carlos Magalhaes said also that Brazil will try to overhaul the representational system in Congress, in which 18 political parties currently sit. That system, which political analysts say makes it difficult to form a majority and enact legislation, has been blamed largely for the legislature's inability to adopt austerity measures proposed by Cardoso to speed recovery from the current economic crisis.

In an attempt to tackle those measures in the short term, however, Cardoso declared that Congress will extend its special session on cutting the nation's massive budget deficit until Feb. 15.

While financial markets generally reacted favorably to Monday's announcements with the key index on the Sao Paulo Stock Exchange rising 5.4 percent on the heels of a massive 33 percent gain on Friday analysts said they expect Brazil's economic problems to deepen, with some predicting that the country is heading for its most serious recession in more than two decades.

In afternoon trading, the value of the real hovered around 1.55 to the dollar, down about 8 percent since Friday. If it continues to fall, financial analysts said they fear the crisis in Latin America's largest nation could pull down the rest of the region, creating a new front in the global economic crisis.

Monday's decision to stick with the hands-off currency policy announced Friday followed weekend meetings in Washington between Finance Minister Pedro Malan, Central Bank President Francisco Lopes and officials of the International Monetary Fund and the U.S. Treasury Department key contributors to a $41 billion loan package designed to shore up Brazil's ailing economy.

Both sides said the meetings went well, despite lingering tensions over Brazil's decision to devalue the real with no input from Washington. "I can assure you that what happened last week is water under the bridge," Malan told reporters in Washington Monday. "We are looking ahead instead of looking back."

Although Brazil's economy has been teetering since those of several East Asian nations began crumbling in late 1997, the threat of collapse became plain only last week. On Wednesday, the government said it had no choice but to accept a lower foreign exchange rate for the real because selling pressure on the currency was becoming overwhelming. The Sao Paulo exchange nose-dived on the news, as did Wall Street and other world markets.