Monday, August 15, 2011

Brazil, Fourth Largest Holder Of U.S. Treasuries, Will Maintain Foreign Reserves In Dollar


Brazil has no plans to sell U.S. Treasuries or change its foreign currency reserves holdings as a result of Standard & Poor’s downgraded U.S.’s credit rating,according to Bloomberg.
As of August 4th, Brazil holds $348 billion in foreign currency reserves, 35% more than in the same period in 2010. About 60% of this total, or $211 billion, is held in U.S. treasuries. Hence, Brazil is the US’s fourth largest creditor, only behind China, Japan, and the U.K.
Since Brazil is such a large creditor, it is in Brazil’s interest to enforce the idea that even though U.S. treasuries are no longer “risk free”, they are and will still be perceived as safe havens. Therefore, Brazil will try to send the following message to the market: Standard & Poor’s downgrade of the US.’s credit rating is only an additional dramatic element but it doesn’t really have a large influence in the current global crisis.
Guido Mantega is Brazil’s finance minister. Following the US's credit rating downgrade, I am expecting polemic declarations from the author of the term "currency war." (Image by Reuters)
On the other hand, some believe that the downgrade marks the symbolic act of the beginning of a new cycle of further uncertainty without the existence of totally “risk free” assets- those that remain classified as such do not provide sufficient liquidity to attend everyone’s needs of safe havens. According to a July report, S&P gives 18 independent entities its highest ranking; examples are Hong Kong, Australia, and the Isle of Man.
Scholarships, jobs and industrial production fell in virtually all countries, a scenario that shows no signs of change in the coming months. Nonetheless, Brazil, according to The Economist, was one of the latest countries to get in the global crisis of 2008 and one of the quickest to bounce back, remains confident it has strong defenses against external crisis. Brazil was upgraded another notch on the investment grade scale this year, disparity between rich and poor is shrinking, and it holds reserves of $ 348 billion.  These factors represent strong defenses against external shocks, at least theoretically. For practical reality, however, Brazil is very exposed. In fact, last Friday Brazil’s stock index plummet, registering the worst performance among the world’s 20 largest equity markets.
Source: Forbes

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