Welcome to the new version of European Tribune. It's just a new layout, so everything should work as before - please report bugs here.

Brazil: net debtor or net creditor?

by Migeru Fri Jan 17th, 2014 at 07:52:53 PM EST

Cross-posted from The Court Astrologer.

I saw something in the Financial Times which is screaming for an SFC treatment...

Beyond BRICS blog: Brazil: net debtor to the world (Jonathan Wheatley, January 15, 2014)

It has been a proud boast of Brasília for several years that it is a net creditor to the world because it holds more in foreign exchange reserves than it owes in overseas debt. However, it is far from clear that this is still the case. The issue is just one example of the vulnerabilities investors must include in their calculations of how Brazil and other emerging markets will fare as monetary policy in the developed world becomes less accommodating.
The gist of the argument is that the Brazilian Central Bank has been using currency swaps to try to drain domestic demand for dollars in an attempt to support its exchange rate. Analysts at BNP Paribas argue that the short sollar position accumulated by the BCB in the process must be subtracted from the foreign reserves, which now (after a few months of sliding Real exchange rate and increasing swap positions) means that Brazil is no longer a Dollar creditor.

Below I argue that this is wrong: Brazil remains a net creditor to the world since the swap positions with the domestic economy cannot affect the external balance (a point on which the BCB is correct). The conclusion I draw is that swaps is not a viable way to support the exchange rate. But we know a central bank cannot support its exchange rate indefinitely in any case. All this shows is that currency swaps with the domestic economy, however "clever", still cannot affect the exchange rate. You need to use reserves for that.


The argument from Beyond BRICS:

At about the same time as the country became a creditor, Brazil's central bank began using a nifty new method of intervention on foreign exchange markets. Instead of buying and selling dollars on the spot market - the standard method of central bank intervention - it used currency swaps. This is a clever alternative because it achieves the same result as buying or selling dollars with no impact on the stock of reserves.

...

The method works because it satisfies demand for foreign exchange contracts by financial market participants looking to hedge foreign exchange exposure or to speculate on movements in the exchange rate. By doing so, it removes demand from the market and has the same effect on the exchange rate as if that demand had been met by buying or selling dollars.

...

But when the US Fed began talking about tapering its QE programme last year, the real went on a slide. Since then, the central bank has upped its currency swap programme to a different order of magnitude. As Gabriel Gersztein and Thiago Alday at BNP Paribas in São Paulo pointed out in a recent note, between May 31 last year and January 10, the bank accumulated a short position on the US dollar through currency swaps of more than $77bn.

...

... Gersztein and Alday at BNP Paribas think a reasonable indication of the cost is to net out the central bank's short dollar position through currency swaps from its foreign reserves...

If we do that, we discover that, thanks to the use of its bazooka, Brazil ceased to be a net creditor to the world in October last year. The central bank's latest figures, for November 2013, show external debt at $312bn and foreign reserves at $362bn, giving a cushion of $50bn. Net out its short position through swaps of $68bn at the end of November and the cushion is gone.

I am not sure I am convinced. If I understand this correctly, the Banco Central do Brasil is offering swaps in the domestic market with one leg indexed to the USD, but settled in BRL. I'm assuming swaps with foreign counterparties would settle in dollars, not in reals.

Assuming that's the case, then, the only effect I see from the swaps in case of a deterioration of the exchange rate is an increase in the domestic money supply in reals. This will just add to the demand for dollar assets, putting even more downward pressure on the real which is exactly the opposite of the intended effect. What this indicates is that the conclusion to draw is not that Brazil is less able to meet its foreign debt commitments, but that swaps are not an adequate way to support your exchange rate. But then we already knew central banks cannot support their exchange rate indefinitely anyway.

To sum up: if the central bank enters into currency swaps with foreign counterparties, the dollar leg of those swaps must indeed be added to the foreign reserves. However, if the central bank is conducting its operations in the domestic market with BRL-settled swaps, this has no effect on the reserve position, but it is also useless for supporting the exchange rate.

In order to make sure, I have conducted an elementary Stock-Flow-Consistent analysis. What this means is to look at macroeconomics with:

  • precision regarding time
  • tracking of stocks
  • several assets and rates of return
  • modelling of financial and monetary policy operations
  • Walras' law and adding-up constraints
(from James Tobin's Nobel Lecture)

One thing this has revealed is that I am not sure by what mechanism trade flows are supposed to affect the exchange rate within an SFC model. I should read chapter 12 of Godley&Lavoie for that, I suppose.

To isolate what's going on with the exchange rate, it is possible to trim down the SFC model substantially, to just three sectors: Brazil (BRA), Brazil Central Bank (BCB), and Rest of the World (RoW). We lose track of the GDP, but that's not much of a loss. This can be seen by looking at the larger model in which the domestic Brazilian economy is described in more detail. This would likely be unavoidable if one were to try to close the model to simulate its dynamics, but for an analysis at the level of accounting the following simplified model appears to suffice.

The only part of GDP that we're interested in is external trade. As money flows between sectors, in fact, domestic demand and income net out in the following table:

BRA (BRL)BCB (BRL)RoW (USD)
Exports+xR-xR/φ
Imports-m$φ+m$
Here lower-case latin letters denote flows, superscripts denote denomination in USD or BRL, and φ denotes the exchange rate USDBRL which, multiplied by a USD amount, yields a BRL amount. Flow variables are denominated in the currency of the seller, and each column is denominated in the appropriate currency. The table can be added row-wise by first multiplying the Rest-of-World column by the exchange rate φ (or dividing the other two columns).

Now, imports are financed by issuing dollar-denominated liabilities and the central bank balances this by accumulating dollar reserve assets:

BRA (BRL)BCB (BRL)RoW (USD)
New $ Liabilities+λL$)φ-λΔL$
New $ Reserves-ρR$)φ+ρΔR$
Here upper-case latin letters are dollar-denominated stock notionals and lower-case greek letters are unit prices. The external stability goal of the Banco Central do Brasil is a positive asset balance with the Rest of the World, namely

λL$ρR$

Next, the Brazilian private sector balances its income by issuing debt and holding cash. We assume the Rest of the World only holds dollar-denominated assets, so net real-denominated debt appearing on the table is the amount monetised by the central bank:

BRA (BRL)BCB (BRL)RoW (USD)
New BRL Debt+βΔBR-βΔBR
New CashCR-(ΔC$)φCRC$

Update [2014-1-18 4:46:45 by Migeru]: Here's the resulting balance sheet:

BRA (BRL)BCB (BRL)RoW (USD)
BRA $ Liabilities-λL$φ+λL$
BCB $ Reserves+ρR$φ-ρR$
BRA BRL Debt-βBR+βBR
Cash+CR+C$φ-CR-C$

The accumulated asset stocks give rise to interest flows. We assume interest flows are set at the start of each accounting period in the currency in which assets are denominated, but are paid at the end of the period. Start-of-period variables are denoted by a '0' subscript. Note the exchange rate does not carry a subscript. Also, held cash pays no interest.

BRA (BRL)BCB (BRL)RoW (USD)
Interest-λ0L$0φ+λ0L$0
+ρ0R$0φ-ρ0R$0
-β0BR0+β0BR0

Optionally, the central bank may enter into currency swaps with its domestic sector:

BRA (BRL)BCB (BRL)RoW (USD)
Swaps New $ Leg+σS$)φ-σS$)φ
Swaps New BRL Leg-σSR+σSR
Swaps Interest-σ0S$0φ0+σ0S$0φ0
+σ'0SR0-σ'0SR0

Here the exchange rate acts at the beginning of the period, because although one of the swap legs is denominated in dollars it is all settled in Reals so the entire Real flow is determined at the start of the period. The condition on the swaps is that they are issued at par, that is,

σS$)φ = σSR

We can put all these tables together into one, adding one final line for the distribution of central bank profits back to the treasury:

Transaction FlowBRA (BRL)BCB (BRL)RoW (USD)
Exports+xR-xR/φ
Imports-m$φ+m$
New $ Liabilities+λL$)φ-λΔL$
New $ Reserves-ρR$)φ+ρΔR$
New BRL Debt+βΔBR-βΔBR
New CashCR-(ΔC$)φCRC$
Interest-λ0L$0φ+λ0L$0
+ρ0R$0φ-ρ0R$0
-β0BR0+β0BR0
Swaps New $ Leg+σS$)φ-σS$)φ
Swaps New BRL Leg-σSR+σSR
Swaps Interest-σ0S$0φ0+σ0S$0φ0
+σ'0SR0-σ'0SR0
Central Bank profits+p-p

Update [2014-1-18 4:52:31 by Migeru]: This is supplemented by a balance sheet (although currency swaps, being derivatives, are "off-balance", here we are modelling them as two separate legs and will add each leg to the balance sheet):

Balance SheetBRA (BRL)BCB (BRL)RoW (USD)
BRA $ Liabilities-λL$φ+λL$
BCB $ Reserves+ρR$φ-ρR$
BRA BRL Debt-βBR+βBR
Cash+CR+C$φ-CR-C$
Swaps $ Leg-σS$φ+σS$φ
Swaps BRL Leg+σ'SR-σ'SR

Update [2014-1-18 5:14:30 by Migeru]: And, to complete the accounting specification of the model, a reconciliation account (recording capital gains) is necessary in order for changes in total asset stock values to be equal to the negative of the 'net new assets' cash flows (from transactions, above), plus capital gains below).

Capital GainsBRA (BRL)BCB (BRL)RoW (USD)
From $ Liabilities-L$0Δ(λφ)+L$0Δλ
From $ Reserves+R$0Δ(ρφ)-R$0Δρ
From BRL Debt-BR0Δβ+BR0Δβ
From $ Cash+C$0Δφ
From Swaps $ Leg-S$Δ(σφ)+S$0Δ(σφ)
From Swaps BRL Leg+SR0Δσ'-SR0Δσ'

The BCB's initial swap strategy is to lend σS$)φ to the domestic sector as a substitute for the latter's need to fund its imports in the external market (net of domestic demand for $ cash): (λΔL$ - ΔC$)φ. This reduces the need to issue new dollar liabilities, and consequenty the need for the BCB to accumulate new dollar reserves.

However, when the BCB tries to support its exchange rate with swaps, it works in the opposite direction. In this case, the Central Bank is responding to excess demand for $ cash from its domestic sector. In that case, ΔS$ must be negative, which is why this works at cross-purposes with the ordinary use of swaps as a substitute for foreign reserves. If the stock S$ becomes negative as a result, the swap interest income -σ0S$0φ0+σ'0SR0 to the private sector is larger, the larger φ becomes. That is, as the Real depreciates, if the BCB tries to fight this with swaps it is forced to inject more and more BRL interest income into the domestic economy. This expansion of BRL income with a depreciating Real can only increase the domestic demand for $ cash from the domestic sector, which is what the BCB was trying to counter, so it is forced to issue even more swaps to support the exchange rate. This can't work, and thus it is not possible for the BCB to support its exchange rate by issuing swaps.

However, nothing that happens in the swaps sector can change the external balance, and therefore the BCB is right that Brazil remains a net creditor to the world, and BNP Paribas is wrong to add the BCB's $ swap leg to the $ reserves.

If we wanted to simulate this we'd need a simple way to extract FX demand/supply (and hence, price pressures) from this scheme. This has to come from the RoW balancing condition, as the CB profits act as a buffer variable for the BRL and BCB sectors.

Display:
I had to get it out of my chest.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Fri Jan 17th, 2014 at 07:53:15 PM EST
I'm not sure I follow your formal analysis.

Specifically, I find it confusing that your rows do not sum to zero because their elements can be denominated in different currencies under your notation. The whole thing would be much clearer (if also somewhat more cumbersome) if you had each of the three sectors hold both dollar assets and liabilities and reals assets and liabilities, and explicitly settled the FX transactions implied by the foreign and domestic sectors' willingness to hold non-native currency.

To this end, I prefer to treat all foreign trade as being transacted in either the currency of the trade bloc hegemon (for unspecified trade with RoW) or in the currency of the higher-ranking party (in the case of specific bilateral relationships). I believe that this better reflects the actual constraints imposed by the international trade and tribute system than the symmetric treatment you impose here.

However, qualitatively I believe your conclusion rests upon the key assumption that the private sector's FX reserves operate broadly similarly to the strategic FX reserve. This is false: The private sector FX reserve is largely inaccessible during a national solvency crisis, and the strategic FX reserve is largely inaccessible in the daily operations of a non-crisis economy.

This is why prudent central banks should maintain strategic FX reserves on the order of the gross, rather than the net FX debt of their private sector (plus the net FX debt of any other branches of government).

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Jan 18th, 2014 at 03:21:37 AM EST
Specifically, I find it confusing that your rows do not sum to zero because their elements can be denominated in different currencies under your notation.
You can just multiply the entire RoW column by φ before adding row-wise.
The whole thing would be much clearer (if also somewhat more cumbersome) if you had each of the three sectors hold both dollar assets and liabilities and reals assets and liabilities, and explicitly settled the FX transactions implied by the foreign and domestic sectors' willingness to hold non-native currency.
Well, it's already the case that the domestic sector holds both Real and dollar assets and liabilities. I'm also assuming the foreign sector has negligible willingness to hold non-dollar liabilities. Those assumptions are easiy relaxed by adding a couple of lines to the matrix.

I also have not exhibited explicitly the balance sheet. Maybe I should do that.

However, qualitatively I believe your conclusion rests upon the key assumption that the private sector's FX reserves operate broadly similarly to the strategic FX reserve. This is false: The private sector FX reserve is largely inaccessible during a national solvency crisis, and the strategic FX reserve is largely inaccessible in the daily operations of a non-crisis economy.
The only simplifying assumption is that the private sector's only foreign asset is cash, but the private sector does hold a foreign asset.

However, the stability condition involves only the domestic dollar liabilities, not the assets. So I am not assuming the domestic dollar cash is accessible in a solvency crisis.

What I am saying is that, if the domestic sector has a demand for foreign assets (cash), "clever" domestic-denominated derivatives won't fool them. So you cannot control the exchnge rate with derivatives.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Sat Jan 18th, 2014 at 04:30:27 AM EST
[ Parent ]
But they aren't doing domestic-denominated derivatives, are they? They're net short dollars, which they must presumably settle at some future date, no? Or are these options merely side bets settled in Reals rather than dollars?

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Jan 18th, 2014 at 06:59:13 AM EST
[ Parent ]
That's precisely the point: the swaps have one leg denominated in dollars, but they are settled in reals.

FT.com: Brazil: net debtor to the world

When the bank uses such a swap to limit the depreciation of the real, it offers to pay the difference between the initial exchange rate and the final exchange rate during the period of the contract, plus a dollar-linked rate of interest (known to traders as the cupom cambial). In return, it receives the cumulative interbank interest rate (currently about 10 per cent a year) on the amount of the contract in Brazilian reals. Crucially, the contracts are settled entirely in reals. No dollars exchange hands and there is no obvious impact on the country's ability to pay its foreign debts.


A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sat Jan 18th, 2014 at 10:12:48 AM EST
[ Parent ]
That's still a dollar liability for the purpose of the internal stability condition (which is external stability plus no index-linked gov't obligations).

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Jan 18th, 2014 at 11:16:22 AM EST
[ Parent ]
I'm not seeing it. The balance sheet is (assuming the BCB has the "wrong" side of the swaps, so the S stocks have to opposite sign from the body of the diary):

Balance SheetBRA (BRL)BCB (BRL)RoW (USD)
BRA $ Liabilities-λL$φ+λL$
BCB $ Reserves+ρR$φ-ρR$
BRA BRL Debt-βBR+βBR
Cash+CR+C$φ-CR-C$
Swaps $ Leg+σS$φ-σS$φ
Swaps BRL Leg-σ'SR+σ'SR

Suppose the domestic sector's $ liabilities of -λL$φ come suddenly due. Because the external stability condition ρR$ > λL$ is being maintained, the BCB can settle the liability with the external creditors in exchange for domestic BRL debt. The result is

Balance SheetBRA (BRL)BCB (BRL)RoW (USD)
BRA $ Liabilities00
BCB $ Reserves(+ρR$-λL$)φ+λL$-ρR$
BRA BRL Debt-βBR-λL$φT+βBR+λL$φT
Cash+CR+C$φ-CR-C$
Swaps $ Leg+σS$φ-σS$φ
Swaps BRL Leg-σ'SR+σ'SR

The subscript T is in case we want to be generous to the domestic sector and not index the new debt to the dollar exchange rate but just vaue it at the exchange rate at the time of the rescue. In that case, the stock of new debt might well be written as
β[BR+(λL$φ/β)T]

But, in any case, to be able to rescue the domestic economy from its foreign entanglements, the swaps position is irrelevant. It is true that the swap legs indexed to the dollar are a potentially domestically destabilising after a "successful" external rescue.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Sat Jan 18th, 2014 at 12:51:48 PM EST
[ Parent ]
You're right that they don't by themselves trigger a hyperinflationary debt-devaluation spiral. But if someone were to engage in unfriendly currency movements aimed at Reals depreciation, then they would adversely affect the ability of the BCB to maintain domestic stability.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Jan 18th, 2014 at 12:57:25 PM EST
[ Parent ]
Well, the fact that the BCB is attempting to prop up its exchange rate with derivatives is an indication that it's more interested in preserving the comprador class' access to foreign consumer goods than in domestic stability. If the Real is sliding it should let it slide, precisely because it needs to preserve its reserve buffer. It is possible that this all has something to do with the 2014 football world cup and the 2016 olympics. After that, all hell might break loose in the domestic market and the swaps might explode in the BCB's face.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sat Jan 18th, 2014 at 01:09:24 PM EST
[ Parent ]
I suppose that's the point the FT article is trying to make:
... Gersztein and Alday at BNP Paribas think a reasonable indication of the cost is to net out the central bank's short dollar position through currency swaps from its foreign reserves. After all, it is not only the stock of reserves but also the broader health of the Brazilian economy that affects its ability to pay its debts.
(my emphasis)
That is something investors may wish to keep a close eye on if, as widely predicted, the real continues to weaken and Brazil's fiscal position continues to deteriorate during 2014 and 2015.


A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sat Jan 18th, 2014 at 02:14:18 PM EST
[ Parent ]
I suppose that's the point the FT article is trying to make.

Clumsily and without focus.  It appears the BCB is attempting to manage currency by playing with financial markets (which it can do) instead of dealing with the actual foundation of the currency, the domestic economy (which it can't), and is doing so with the acquiescence of the government, which doesn't want to deal with the economy either.  Which supports your conclusion that they are simply manipulating money for the benefit of the moneyed.

by rifek on Thu Jan 30th, 2014 at 11:59:31 AM EST
[ Parent ]
I have added explicit balance sheet and reconciliation (capital gains) tables to all this to hopefully clear some of the confusion.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sat Jan 18th, 2014 at 05:16:12 AM EST
[ Parent ]
explicitly settled the FX transactions implied by the foreign and domestic sectors' willingness to hold non-native currency
How do you suggest to make the FX settlement explicit? I've been raking my brain abuot that all week and I can't see how to make that visible.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sat Jan 18th, 2014 at 06:01:39 AM EST
[ Parent ]
You use 6 columns:
Domestic nongov't domestic currency account
Domestic nongov't foreign currency account
Gov't domestic currency account
Gov't foreign currency account
Foreign domestic currency account
Foreign foreign currency account

An export transaction would then be (assuming the foreign trade is transacted in foreign currency):
Domestic nongov't domestic currency account
+Xphi Domestic nongov't foreign currency account
Gov't domestic currency account
Gov't foreign currency account
Foreign domestic currency account
-Xphi Foreign foreign currency account

And since the domestic sector does not wish to hold foreign currency, it will engage in an FX transaction with the domestic CB:

An export transaction would then be (assuming the foreign trade is transacted in foreign currency):
+X Domestic nongov't domestic currency account
-Xphi Domestic nongov't foreign currency account
-X Gov't domestic currency account
+Xphi Gov't foreign currency account
Foreign domestic currency account
Foreign foreign currency account

Similarly, if the gov't wants to build strategic currency reserves, it will engage with the foreign sector:
Domestic nongov't domestic currency account
Domestic nongov't foreign currency account
-X Gov't domestic currency account
+Xphi Gov't foreign currency account
+X Foreign domestic currency account
-Xphi Foreign foreign currency account

But since the foreign sector does not wish to hold domestic currency in non-negligible amounts, it will close out its transaction by dealing with the domestic private sector:
+X Domestic nongov't domestic currency account
-Xphi Domestic nongov't foreign currency account
Gov't domestic currency account
Gov't foreign currency account
-X Foreign domestic currency account
+Xphi Foreign foreign currency account

This picture represents the net positions. You can further split each column into a full balance sheet. Which you should if you want to discuss foreign stability, because the (strong) foreign account stability condition for a non-hegemonic economy is that neg gov't long FX position exceeds the private sector's gross short FX position and that the current account is not in deficit.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Jan 18th, 2014 at 06:44:15 AM EST
[ Parent ]
And since the domestic sector does not wish to hold foreign currency, it will engage in an FX transaction with the domestic CB
It makes much more sense that the foreign (hegemonic) sector does not wish to hold domestic currency. If is a fact that the domestic sector does want to hod dollars. Brazilian banks offer dollar deposit and there is even a specific interest rate (cupom cambial) in Brazil for that purpose. In fact, the dollar leg of the government's currency swaps not only has its notional denominated in dollars but the coupons are indexed to the cupom cambial.
FT.com: Brazil: net debtor to the world
When the bank uses such a swap to limit the depreciation of the real, it offers to pay the difference between the initial exchange rate and the final exchange rate during the period of the contract, plus a dollar-linked rate of interest (known to traders as the cupom cambial). In return, it receives the cumulative interbank interest rate (currently about 10 per cent a year) on the amount of the contract in Brazilian reals. Crucially, the contracts are settled entirely in reals. No dollars exchange hands and there is no obvious impact on the country's ability to pay its foreign debts.
(already quoted elsewhere in this thread, but okay...)
You use 6 columns:
Domestic nongov't domestic currency account
Domestic nongov't foreign currency account
Gov't domestic currency account
Gov't foreign currency account
Foreign domestic currency account
Foreign foreign currency account
Well, that's equivalent to using three columns and keeping the dollar and real assets separate, which is what I do in my balance sheet.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sat Jan 18th, 2014 at 01:11:23 PM EST
[ Parent ]
I don't have to understand a diary to recommend it, do I?

'tis strange I should be old and neither wise nor valiant. From "The Maid's Tragedy" by Beaumont & Fletcher
by Wife of Bath (kareninaustin at g mail dot com) on Sat Jan 18th, 2014 at 12:59:08 PM EST
Then why would you be recommending it? Because of The Nonsense Math Effect?

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sat Jan 18th, 2014 at 01:01:32 PM EST
[ Parent ]
I recommend it because I appreciate that European Tribune is a place where people smarter than me post things that are challenging and brainy.

'tis strange I should be old and neither wise nor valiant. From "The Maid's Tragedy" by Beaumont & Fletcher
by Wife of Bath (kareninaustin at g mail dot com) on Sat Jan 18th, 2014 at 02:08:41 PM EST
[ Parent ]
Okay, but now that I've read your link, I can certainly see that point, too. Thanks.

'tis strange I should be old and neither wise nor valiant. From "The Maid's Tragedy" by Beaumont & Fletcher
by Wife of Bath (kareninaustin at g mail dot com) on Sat Jan 18th, 2014 at 02:26:28 PM EST
[ Parent ]
Questions are more useful than recommends.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sat Jan 18th, 2014 at 02:27:54 PM EST
[ Parent ]
Understood.


'tis strange I should be old and neither wise nor valiant. From "The Maid's Tragedy" by Beaumont & Fletcher
by Wife of Bath (kareninaustin at g mail dot com) on Sun Jan 19th, 2014 at 04:20:43 PM EST
[ Parent ]
I was going to make a joke to the effect of "OMG, I've become an expert" but went for the Nonsense Math Effect anyway. Nevertheless, I say the same thing three times, twice without maths, and once entirely above the fold, and still I'm not understood, which is a disappointment.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon Jan 20th, 2014 at 02:11:48 AM EST
[ Parent ]
Trust me, it's not you... it's me. These days I learn slowly and forget quickly, as I often say in Deutsche to people I meet here.

'tis strange I should be old and neither wise nor valiant. From "The Maid's Tragedy" by Beaumont & Fletcher
by Wife of Bath (kareninaustin at g mail dot com) on Wed Jan 22nd, 2014 at 10:14:27 AM EST
[ Parent ]
Perhaps it would have been more understood, if you had said it once, without the math. Not understanding the entire text appears to often trigger doubts on wheter one understands parts of it.

I noticed when I studied economic history that the pretty meaningless economics equations attached in the margins got students with a non-math background uncertain if they had understood the description of rise and fall of industries in the 19th century. Once they knew it was nonsense that could not possible appear on any exam (because I told them as much) and ignored it, the uncertainty went away.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Wed Jan 22nd, 2014 at 03:05:53 PM EST
[ Parent ]
So what BCB is doing is offering to pay Brazilians in BRL what they would have made had they held US$s instead over a given period of time. So instead of those who take the deal selling BRL for US$ they take the swap?

I presume that there is at least the possibility that some event could cause the trade to go the other way and BCB would make money instead of losing money, but as all the settlement is in BRL, which BCB issues, the problem becomes one of keeping profits made from this swap by Brazilians from being used to buy US$s. I suppose it depends on how long the BRL continues to depreciate wrt the US$.

Assuming that the events of the World Cup and the Olympics bring lots of foreign currency into Brazil, how is the amount of such currency expected to compare to the amount of profits to the comprador class from the swap scheme? Might it be sufficient to reverse the direction of the swap or lead those engaging in the swap to wind it down?

Another question is the extent to which the depreciation of the BRL wrt the US$ is due to the capital investment in sports facilities in Brazil. It is so typical for the host of such events to end up paying exorbitantly for the 'honor'. I have little doubt that a similar investment in education, health and transportation infrastructure would have been far more useful to the long term benefit of the Brazilian economy. Local elites have undoubtedly benefited handsomely, but for the rest - not so much.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Jan 18th, 2014 at 10:17:49 PM EST
I presume that there is at least the possibility that some event could cause the trade to go the other way and BCB would make money instead of losing money
Indeed, from the FT:
And of course there is a cost. If the swaps are successful - and a central bank working paper [PDF] published in July 2013 suggests they often are - then the bank may even make a profit on them. But what if the real continues to slide, in spite of the central bank's heavy weaponry? The currency has shown some resilience since the panic went out of foreign exchange markets last September. But it has still weakened from R$1.95 to the dollar last March to about R$2.35 today. Every time its swap contracts go against it, the central bank - or rather Brazil's national treasury - takes a hit.
the problem becomes one of keeping profits made from this swap by Brazilians from being used to buy US$s. I suppose it depends on how long the BRL continues to depreciate wrt the US$.
That's why I say in the diary:
the only effect I see from the swaps in case of a deterioration of the exchange rate is an increase in the domestic money supply in reals. This will just add to the demand for dollar assets, putting even more downward pressure on the real which is exactly the opposite of the intended effect
Perhaps I should say "the only immediate effect", as the discussion with JakeS illustrates that there are domestic stability problems associated with increasing the gross amount of foreign-denominated or index-linked liabilities in the system.
Assuming that the events of the World Cup and the Olympics bring lots of foreign currency into Brazil
and assuming that means the real starts appreciating again, then the currency-propping swaps will become profitable for the BCB.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sun Jan 19th, 2014 at 06:29:51 AM EST
[ Parent ]
The BCB's policy is going to get a stress test:

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue Jan 28th, 2014 at 06:23:08 AM EST


Display:
Go to: [ European Tribune Homepage : Top of page : Top of comments ]

Top Diaries

A Trip to the Woodshed

by Cat - Nov 3
20 comments

Catalonia?

by Frank Schnittger - Oct 28
17 comments

The Brexit effect

by Frank Schnittger - Oct 25
20 comments