Brazil admits defeat in currency wars
The Brazilian consumer has lost confidence in the his country’s government and that has a lot to do with the currency wars on the forex markets. Almost five years ago Brazilian Finance Minister Guido Mantega warned for the first time about those wars. The largest countries in the world are involved in a struggle to make their currency as cheap as possible, hoping that by so doing they will gain a competitive economic advantage on the world export markets. Mantega gave the world a warning in 2010 that sounded out loud and clear: in the end nobody can win a currency war. But the irony is that the country which first sounded the alarm bell seems to be the hardest hit by these currency wars.
Consumer confidence at lowest ever level
The inhabitants of the country have lost confidence in their government, because Mantega & Co. weren’t able to find a solution to the problem of a drowning currency. The Brazilian Real is, furthermore, one of the currencies which was hit very hard by the rise of the US dollar. The government of the country holds a large part of its outstanding debt in dollars and this is a major handicap in the current circumstances.
Brazilians admit defeat
The Brazilian central bank has tried as long as possible to defend the Real, but has now admitted defeat. Earlier this week the central bank announced it will no longer support the currency, which means that the free market will do its work. Brazil is the second country to admit defeat in the currency wars: a few weeks ago the Swiss central bank announced it had unpegged the franc. The Swiss would no longer hold their franc to a fixed exchange rate with the Euro. Admitting defeat means the Brazilian economy is in deep trouble, and a recovery in the short or medium term seems unlikely. In her ‘The Real World Economic Outlook’, well-known economist Ann Pettifor predicts huge problems for the Brazilian economy. The currency wars may hurt the country a lot more in the months to come. | 03/04/2015 | Tim Harrup