Dirty floats, (III)

Following Dirty Floats I and Dirty Floats II, comes Brazil’s latest move into the Club For Carriers Of Big Sticks.

Brazil will create a sovereign wealth fund with the primary aim of intervening in foreign exchange markets to counter the appreciation of Brazil’s currency, according to Guido Mantega, finance minister.

“It will have the function of reducing the offer of dollars in the market and helping the real to appreciate less,” he told the Financial Times.

Honestly. Give some people a barely-accessible-maybe-superfield and they think they can do anything. The full transcript of the interview here. Some interesting views on taxation and tax reform, at least. Back to the sovereign wealth fund:

FT: What about the sovereign wealth fund that you announced in October. How are plans progressing?

MR MANTEGA: This is a normal reaction of a country accumulating foreign reserves, giving it greater fire power in its international reserves. All countries accumulate reserves and this is nothing different from what other countries do.

What we want to do is something very modest. Our reserves will soon reach $180bn. Along side the reserves we will create a fund to buy dollars in the market. It will be defined by law, it doesn’t exist yet so it needs new laws. It will have a limit of say $8bn, $10bn to be accumulated over time. Today it is the central bank that buys dollars. In future we will have the fund also buying. It will have the same function as our reserves, to take out excess liquidity of dollars that cause the currency to appreciate. So it will have the same function as central bank intervention in foreign exchange markets.

FT: Aren’t sovereign wealth funds usually created by countries with surplus income either from government-controlled exporters or from other budget surpluses? That isn’t the case in Brazil.

In oil exporting countries with sovereign wealth funds, either the exporting companies are public, so their revenue is primary income, or the countries charge a tariff, which is also primary income. That is one model. Other countries, for example India, aren’t like that. It has a nominal budget surplus and reserves. So our primary budget surplus is identical to having reserves, it is equal to our reserves.

I do believe he will find that opinions differ, on a few of those points (and others, such as using the fund to enhance capitalisation/liquidity for Brazilian firms when they try to make plays overseas).

Why worry? Besides the fact that Sovereign Wealth Funds are just plain dodgy; this one in particular plays at managing the erstwhile floating exchange rate of the Real (this is not unusual: a “dirty” float is a managed-within-certain-parameters floating exchange rate. Bobbing exchange rate, if you like: not allowed to go too far in any direction), but not in the manner of the erstwhile independent Central Bank.

This means, naturally, that the management of the float need not be undertaken solely according to the relatively benign criteria of price/money stability. With his talk of aiding Petrobas, in fact, Mantega has signalled precisely the opposite.

The fund will also, it seems, encroach actively upon the Central Bank. Back at the interview:

our primary budget surplus is identical to having reserves, it is equal to our reserves.

Our reserves will continue to rise. Every day there are excess dollars in the market. Every day the central bank buys a billion or half a billion dollars and puts them in the reserves. With the sovereign wealth fund we will have another agent doing currency auctions and buying dollars. So instead of the central bank buying a billion, like yesterday, the central bank will buy half a billion and the fund will buy the other half.

So now the Central Bank, formerly able to buy dollars independently of the government, can now only do so half as much. The other half is managed out of the Treasury.

This basically reads, in toto, as a fairly structurally deliberate move away from Central Bank independence (or further away: I don’t really know how Brazil rates). Just imagine the US, UK, etc. equivalent, though. The US Treasury department taking over half of the reserves with which the Federal Reserve manages the US dollar (hypothetically. Supposing somebody managed it). I’m assuming – hopefully correctly – that we’d hit the damn roof.


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