In the scramble to devise lasting solutions for Brazil’s fiscal troubles, Berkeley professor Barry Eichengreen, IDB chief economist Ricardo Hausmann and Jurgen von Hagen of Indiana University have recently reached into the archives and dusted off an idea that they first introduced in 1996 as a solution to the region’s volatility.

Using the concept of an independent central bank as a model, the groups of scholars proposed that Brazil create a national fiscal council whose sole task would be to set a ceiling on the country’s deficit. The body, which would be legally independent of the government with its own staff and budget, would meet six months before the beginning of each fiscal year and, armed with economic indicators and fiscal projections, would determine how much debt the country would be able to sustain.

“This approach has considerable appeal as a way of enhancing the credibility of the government’s commitment not to overspend without eliminating fiscal flexibility,” said Eichengreen, to a skeptical crowd of bankers and economists at a recent conference in Rio de Janeiro.

He stressed the council, unlike the central bank, would not have discretionary powers over fiscal policy; it would not interfere in the politically sensitive areas of government spending or tax levels. The group’s ability to enforce its target would also be predetermined. If legislators began the fiscal year with a budget that extended beyond the mandated fiscal target, the previous year’s deficit spending would apply until congress and the executive could comply with the new ceiling. If overspending occurred anytime during the year, the government would have 30 days to eliminate the discrepancy before automatic adjustments would be carried out-a rise in the value-added tax or across the board spending cuts.

Even those who grumbled about the constraints that a national fiscal council would impose had to admit that the alternative was even less appetizing. “I do think that one of the merits of this proposal is that it is a way to renationalize functions that countries have been forced to be cede to the IMF,” said Eichengreen. “For those who worry about the loss of autonomy, think about the loss of autonomy occurring internationally that could be reversed by adopting this kind of solution.”

For those who feared another bloated Brazilian bureaucracy, Eichengreen said that the body needn’t be much larger than the less than a dozen people who comprise the IMF team itself.

Felaban Board Members Named
The Federation of Latin American Banks (Felaban) welcomed four new members to its board at its annual meeting in November.

Joining the board are Carlos Eduardo Sanchez, president (president of Banco de la Provincia de Buenos Aires); Juan Antonio Niño P., first vice president (president of Panama Banking Association); Paulo Roberto Soares, second vice president (managing director, Banco Itau S.A.); and Jorge Humberto Botero, member (president of Banking Association and Financial Institutions of Colombia).

Parting Company
The merger between Travelers Group, the parent company of Salomon Smith Barney, and Citicorp has created one of the largest financial services firms in the world. Yet it has also impacted the relationships that the former Salomon Brothers developed in Latin America over the past decade, while at the same time providing an opportunity for Chase Manhattan to beef up its Brazilian operations.

Early this year, just after Salomon Smith Barney decided to end its long-standing affiliate relationship with Banco Patrimonio, Chase Manhattan announced that it would buy the Brazilian investment bank for an undisclosed amount. Under the agreement, the merged companies will operate under the name Banco Chase Manhattan, with Chase acquiring the Patrimonio trademark, not the bank through which Patrimonio has conducted its business.

Brian O’Neill, Latin American executive at Chase Manhattan, also said that they will not buy Patrimonio private equity operations, in which the US bank is already a partner.

“What attracted us to Chase was the institution’s commitment to becoming the leading investment and wholesale banking franchise in Brazil,” said Olimpio Matarazzo, one of three Patrimonio partners who will be joining Banco Chase.

“They compliment us well in terms of M&A capability,” said O’Neill. “I think we have about $1.3 billion (in Brazil) and they have about $1.2 billion in assets under management.

And now $2.5 billion is a much smarter number and makes us more relevant in a Brazilian context.”

Banco Patrimonio is Brazil’s third largest investment bank and was one of the few institutions still owned by a private partnership. Salomon Smith Barney severed its 10-year joint venture with Patrimonio on December 22, citing that it would now work in conjunction with Citicorp’s local offices in Latin America. Early in the year, the investment bank made similar moves in Argentina, where another of its affiliates Merchant Bankers Asociados (MBA) announced it would repurchase Salomon’s 49% stake in its sales and trading unit.

MBA is 75% owned by its chairman and CEO Alejandro Reynal and its Argentine shareholders Jorge Bustamente, Daniel Marx and Rafael Seragopian. The remaining 25% is owned by Darby Overseas Investments and the International Finance Corporation (IFC).

Citibank officials declined to comment about the changes in its Latin American operations, but did confirm that Chile’s Celfin had also ended its partnership with Salomon.

Walter Molano Joins BCP Securities
Former Warburg Dillon Read economist Walter Molano has re-appeared at Greenwich, Connecticut-based BCP Securities, where he is now head of research focusing on sovereign, corporate and currency issues out of Latin America.

While at Warburg Dillon Read, Molano won the gold medal in LatinFinance’s 1998 Research Olympics in the economist covering Peru category.

Santander Names Co-Heads of Equity Research
Santander Investment Securities has named Victoria Santaella and Jonathan Arnold as co-heads of Latin American equity research in New York, replacing Juan Carlos Garcia who has now become head of Latin American equities at Santander Global Advisors in Boston.

Santaella, who will continue to cover the steel and electric utilities sectors, explains that while she will be taking on extra duties, her managerial obligations will not represent more than 30% of her time. “I don’t want to forget about the steel companies because it’s a sector I have been covering for nine years.”

Arnold said that he will also continue covering electric utilities.

The plan, says Santaella, is to focus on core sectors and stay clear of small cap companies and closely held stocks, which in any case only represented between 5% and 7% of Santander’s total business. While other banks are adapting a more global focus, she adds, Santander is planning to strengthen its local presence.

The Speiss Brothers
Those wondering whether the notion of family loyalty is important on Wall Street these days may want to pay a visit to PaineWebber’s Manhattan branch, where brothers Robert Spiess, 44, and Nelson Spiess, 46, have recently been named senior vice presidents of investments.

After a 10-year stint at Lehman Brothers in New York, the two bankers say they decided to join PaineWebber where they will continue to service international private clients, high-net worth individuals and institutions.

Nelson Spiess explains that having two brothers working together can be beneficial.

For instance, he says, when one travels overseas, the other can stay home taking care of clients. That tag-team strategy seems to be working. Not only do they have clients going back 20 years, but they also are currently looking to add members to their team.

The two Venezuelans began their careers at Merrill Lynch. At that time, however, the US investment bank’s internal policy prohibited members of the same family from working in the same office. So Nelson went to Caracas, while Robert landed a job with Merrill in Panama. In 1988 they moved to New York and both joined Lehman Brothers. “At the end of ’88 we actually joined forces and since then our business has really become important,” said Robert.

Hedge Funds Beat Mutual Funds
Hedge funds-a recent anathema for both market players and politicians alike-did score highly in some areas despite a blitz of bad publicity last year, at least according to fund investment advisory Van Hedge Fund Advisors International, Inc (VAN).

Van says that the average US hedge fund has substantially outperformed the average equity and bond mutual funds year-to-date through November 1998, although they still fell short of returns achieved by the S&P 500 late last year.

“This year (1998) has been a nearly perfect textbook example of why qualified investors should consider a portion of their portfolios to hedge funds. In the current economic environment, one that has been characterized by significant volatility both at home and abroad, US hedge funds on average have managed to protect their investors’ capital.” said George P. Van, chairman of VAN.

US emerging markets hedge funds produced their best returns so far this year at 5.3% net in November. Year-to-date through November, the best performing hedge fund investment styles worldwide were US Market Timing (+38.6%), Offshore Aggressive Growth (+20.1%), US Aggressive Growth (+19.6%) and Offshore Market Timing (+16.5%).

IIC Names New General Manager
After a long-awaited approval process, John C. Rahming has finally been appointed general manager of the Inter-American Investment Corporation (IIC) by the board of executive directors.

Rahming, who has been interim general manager since 1993, has restructured the corporation to focus more on equity investments and advisory service, according to the IIC.

Rahming has a background in finance and management consultancy, including several years of banking experience in Latin America.

In 1998, the IIC had its ninth year of operations with 28 approved transactions and a total of $230 million in resources for the region. It has also added four more private equity funds totaling $800 million and increased its cofinancing program by $160 million.

CLSA Hires Felix Boni
Emerging market veteran Felix Boni has been hired as head of Mexican research at CLSA Global Emerging Markets in Mexico City, where he says he will take on a “general coordinating” role and concentrate on conglomerates. Boni has 10 years of experience in equity research and has worked at West Merchant Bank, ING Barings and HSBC James Capel Research. He holds a doctorate in political science from the University of Pittsburgh and a master’s in business administration from La Salle University in Philadelphia.

More Money for Brazil?
With all the turmoil created last year by Asia’s currency crisis and the continuing uncertainty over Brazil, it is perhaps not surprising that Eduardo Costantini, chairman of Argentina-based Consultatio Asset Management, was taking a defensive position in Latin American markets as 1999 loomed on the horizon.

In December, he told LatinFinance that 65% of his portfolio sat safely in cash, with only 5% in equity and 30% in debt.

One of the riskiest Latin countries today, says Costantini, is Brazil which carries a domestic debt burden of about $300 billion, about three times the amount that the government held when the Real Plan was implemented in 1994. That is all the more worrying when considering the country’s high interest rates, which-although falling-were hovering in the mid 20% range late last year.

“Everybody in the real economy is paying that cost,” he said. “If you implemented a $20 billion fiscal package, you are just paying 25% of the cost of servicing that debt. So the $41 billion international package is not the final solution, as was the package for Mexico back in 1995.”

So what is the answer? Costantini suggests that one possible solution is more money. In fact $80 billion more. That amount, he says, would allow the government to redeem a decent chunk of its debt and thus lower interest rates.

Of course, as Costantini points out, a rescue package of that size was clearly not on the minds of most in the global financial community at the end of last year. That attitude may have changed in mid-January after investors once again panicked in the wake of Brazil’s devaluation, denting the credibility of the IMF’s $41 billion package.

Slow Growth Rate Predicted
This year, developing countries will experience the lowest growth rates they have seen since the debt crisis of the 1980s, according to a recent World Bank report.

The report, entitled “Global Economic Prospects and the Developing Countries 1998/99,” pegs much of the slowdown in developing economies to what it calls the “unprecedented depth and severity of the recession in the crisis countries of East Asia and its contagion effect on the rest of the world.”

“Few countries have not been touched by the global forces which (the) crisis-by some accounts, the worst that the world has experienced since the Great Depression-has unleashed,” Joseph E. Stiglitz, the World Bank’s chief economist and senior vice president, said at a press conference.

He went on to add that “the heart of this current crisis…is the surge of capital flows: the surge in, followed by a precipitous flow out. Few countries, no matter how strong their financial institutions, could have withstood such a turnaround, but clearly, the fact the financial institutions were weak and their firms highly levered made these countries particularly vulnerable.”

The report suggests that more stress should be given to the individual circumstances of each country and that focus should also be placed on both the aggregate demand and aggregate supply.

SEI Acquires Fortum
SEI Investments Company has acquired Fortum S.A. de C.V., an independent asset management firm based in Mexico City.

Founded in 1996, Fortum offers portfolio management solutions for Mexican pension funds, individuals and foreign institutional investors. The firm, which was renamed SEI Investments de Mexico, will focus on providing long-term strategic investment solutions for institutions and wealthy individuals.

SEI Investments, based in Pennsylvania, is a global asset management firm with over $140 billion in assets under management and administration.

Herbert DiBonaventi Joins DCR
Herbert DiBonaventi has been hired to cover the Latin American food and conglomerate sectors at Duff&Phelps Credit Rating Co.’s recently established international group.

Formerly at Mellon Bank, DiBonaventi says that he follows companies on a quarterly basis and plans to come out with three reports this year, including one on bankruptcy in Latin America. DiBonanventi has an MPIA (master’s of public in international affairs) and an MBA from the University of Pittsburgh as well as a JD (Doctor of Laws) from Syracuse University.

Giovanny Grosso has also joined DCR’s Latin American group as a research associate. He previously worked for Northern Trust Company as a securities technician in the world trade operations division.

Brazil Central Bank Confirms Free Float
São Paulo, Jan 18 (Bloomberg)-Brazil’s central bank is expected to confirm this morning its decision Friday to let the currency float against the dollar, which pushed the real down 7.8% to 1.43 reais.

The real may weaken further today, as the devaluation makes it harder for Brazil to slash its budget deficit, and may boost inflation and curb economic growth.

“The impression given Friday was that freeing the exchange rate resolved everything,” said Joaquim Kokudai, a money market trader at Lloyds Bank Plc in São Paulo. “In reality it resolved nothing.”

Brazil’s “C” bond, its benchmark dollar debt, rose 1.8% to 57.375, following a 15% gain Friday as investors applauded Brazil’s decision to let the currency float. Stocks may also gain today on expectations of lower rates.

“The government cannot go against the markets,” said Carlos Eduardo de Freitas, a professor of economics at the Fundacao Getulio Vargas, an economic research center in Brazil, and a former central bank director.

Brazil’s decision Friday to let the market set the rate for the real sent stocks and bonds soaring, as investors speculated it will ease interest rates and allow Brazil to stop its costly defense of the currency. The benchmark stock index soared 33%-25% in dollar terms-its biggest one-day gain in eight years, according to São Paulo stock exchange estimates.

Still, Brazil is not out of the woods yet, and must slash its $64 billion budget to boost investor confidence and ensure a quick decline in interest rates.

The devaluation may help the country buy time to negotiate with the International Monetary Fund and the US government on possibly revising terms of a $41.5 billion aid package put together only two months ago. Brazilian officials spent the weekend in Washington in discussions with the Treasury Department, the IMF and the World Bank.

“We’ve always said that there will not be capital controls, and you know that,” Brazil’s Finance Minister Pedro Malan told reporters in response to a question.

The Brazilian officials were expected to request an advance installment on the aid package the IMF organized in November, Brazilian radio reported. Brazil, which received $9 billion from the package last month, is expected to receive about another $9 billion at the end of February, with about half of that from the IMF. The IMF turned down Brazil on the weekend, Folha de S. Paulo newspaper reported.

The country wants the disbursements to be available sooner to protect against further capital flight and sharp declines in the real.

Brazil’s central bank wouldn’t comment Friday on its plans for the currency, prompting speculation the bank may reintroduce some trading limits on the currency to keep it from devaluing too quickly. The real lost 15% of its value last week along, closing 1.43 to the dollar, compared with 7% in all of 1998.

Still, the central bank is likely to let the currency float for the time being to restore investor confidence while avoiding a new round of capital flight, analysts said. The currency could trade in a range of 1.4 reais to 1.5 reais to the dollar this week, economists and traders said.

“There is nothing to indicate that (the free float),” will change, Communications Minister Pimenta da Veiga told newspapers, following a meeting with President Fernando Henrique Cardoso.

By setting new trading bands, which were in place until Friday, the government would have to tap into its reserves to keep the currency from weakening. “The foreign exchange policy of trading is exhausted,” said Nicola Tingas, head economist at WestLB bank in São Paulo. “It will be healthy to let the real float to find an equilibrium.”

The rising capital outflows prompted Brazil to end its costly defense of the real. With outflows up to $1 billion a day, Brazil’s reserves plunged to about $30 billion, from $75 billion in August, not including the IMF-led aid package. The net outflows slowed to about $320 million Friday, from $1.8 billion Thursday, newspapers reported. Brazil has agreed with the IMF not to let reserves fall below $20 billion, or enough to finance four months of imports.

Inflation is expected to rise about 5% or 10% this year because of the devaluation, from the deflation of 1.8% in 1998, economist said. The devaluation is also likely to deepen an expected recession, with the economy contracting as much as 5%.

The weaker currency also makes it harder for Brazil to slash its estimated $64 billion budget deficit because financing costs on its dollar-linked debt will rise. This could be offset by a decline in benchmark interest rates, now at 29% a year.

Brazil’s congress plans to speed up voting this week on spending cuts and tax increases.

The passage of the measures-a financial transaction tax and a bill to cut pension spending-are seen as crucial to government plans to restore investor confidence and limit declines in the currency.

“Approval of these measures are now more necessary than ever,” said Freitas. “The foreign exchange rates will be a thermometer of the works in congress.”

Regarding the article “Hot Property” published in the November issue, we would like to make the following clarification about the World Trade Center complex in São Paulo: COMPASS Asset Management Services manages the World Trade Center and the D&D Shopping Mall, as well as the common grounds outside the Gran Melia Hotel. COMPASS does not manage the operations of the Gran Melia, nor are we aware of any past operational problems within the hotel property. The Gran Melia São Paulo was ranked among the best hotels in São Paulo in LatinFinance’s Corporate Travel Guide to Latin America (May, 1998).

Bank of the Year

Banco Itau’s Barretto Accepts Banking Award
Alberto Barretto, director of the international division of Brazil’s Banco Itau, accepted LatinFinance’s Bank of the Year award on behalf of his institution during a reception at the November annual meeting of the Federation of Latin American Banks (Felaban) in Panama City, Panama.

Banco Itau was named best bank regionwide for its steady and profitable course in a financial environment that has been hit by soaring interest rates and an invasion of foreign competitors. Despite those obstacles, Itau-the fifth largest bank in the region with total assets of $41.4 billion-managed to post a 14.4% increase in profits year over year in the first half of 1998. And its annualized return on equity for the first half of 1998 was 18.4%-up from 17.2% in 1997. Not to be outdone in an increasingly competitive banking environment, Itau’s management team, headed by President and CEO Roberto Setubal, has not only pushed ahead in the insurance and pension markets, but has also made a number of strategic acquisitions, including last year’s purchase of Minas Gerais state bank Bemge. If Setubal gets his way, Banespa-the pearl of the Brazilian state-controlled banking system up for sale this year-could be Itau’s next acquisition.

Marco Aurélio Garib, CEO and founder of EverSystems, co-host of the ceremony with LatinFinance, was also at hand at the awards ceremony, and noted that Itau’s efficiency, profitablity and technological prowess had placed it at the forefront of Brazil’s banking system.

Edited by Onelia Collazo