Stock Market Flexibility
Eight years ago, when the Asian crisis had swept across Europe and the Atlantic and into the Americas, Russia sought to impose full currency controls as the government froze bank accounts, treasury bills and wire transfers. Cash flow virtually ground to a halt. This occurred as the ruble fell 194.2% from a bright performance during the previous year. Such a measure had the ability to launch sell-offs that can deprive trillions of dollars from circulating in the rest of the global market. As of May 1999, inflation was a t 115% with a growth rate slowing down to 4.6%. The ruble was still down 76% and the stock market was also down 69%.
A tight control on currency is a measure that did gain considerable acceptance among a number of economies during the height of the 1998 worldwide recession. Malaysia thought it wise to freeze trading with its ringgit to stop the flight of its economy's funds. Investors, as a result, were repelled the more by the policy and had thrown others off into an indefinite time until finally deciding to re-invest in the country. Credit rating agency Standard & Poor's downgraded the country's long-term debt status one mark above the negative level,
Brazil was another story. The crisis crossed the Atlantic and began knocking on the doors of Latin America. Brazil, the world's eighth largest economy and South America's largest, had its real down 9.5%. It held a policy which was followed by much of Asia, the Middle East, and Africa. Russia also had the same before it considered controlling its currency. Called the intermediate controls policy, it linked a country's currency to the American dollar but had to raise interest rates instead of putting a lid on the entire economy to keep investments from evaporating.
With $52 billion worth of foreign-exchange reserves, Brazil defended its currency and supported its stand with the dollar. Interest rates rose to a staggering 50% annually to invite more foreign cash. According to economists, Brazil served as a buffer for the rest of its neighbors, Argentina specially whose 30% of its exports went to Brazil.
Brazilian President Fernando Henrique Cardoso repeatedly vowed never to succumb to the pressures to devaluate the real, not one bit. But this proved too rigid up to the time when the real needed some elbow room to shoot up. Without such, the currency continued its decline until January 15, 1999 found it at $.67 to a dollar. In an ingenious display of prudence and sensibility, the central bank allowed the real to float freely until buoying to about 1.42 to the dollar. Suddenly, the Bovespa, Brazil's largest stock market, shot up to 33%, even boosting the ailing Dow Jones index up to 220 points. Breathing room, finally! With the currency at more manageable levels, interest rates had been reduced and the exports were enhanced. The Argentine peso was not the only currency save that day, but also the Mexican currency.