Friday, August 12, 2011

Brazil's Reserves Exceed U.S.$350B For The First Time

Brazilian international reserves were up $ 1.588 billion on Wednesday, rising to a total of $ 350.881 billion, a new all-time record.

The increase reflects, among other things, the purchase of U.S. dollars held by BC on August 8 and the oscillation of the market value of the assets comprising the reserves, as titles of U.S. debt.

According to Fabio Kanczuk, economics professor at the University of Sao Paulo, by maintaining the strategy of accumulation of international reserves, Brazil has chosen the most expensive insurance that exists. He said the actual amount kept for 12 months, the cost of the reserves would approach $ 35 billion per year. "The cost of carrying this money is very high, but there is some usefulness to go against the appreciation of the real," he acknowledges.

Kanczuk says the high cost of maintaining reserves is explained by the need for government to borrow in dollars - paying Selic interest rates of 12.5% a year - to buy dollars and invest them in U.S. government securities that pays rates close to 2% in the ten-year notes. The difference between the two rates - about ten percentage points - is funded by the National Treasury of Brazil.

"It's very expensive to pay a bill of at least $ 35 billion. The strategy is quite questionable because there is a moment that, despite increasing the volume of reserves, the benefit of having such insurance does not rise" says Professor of USP. Kanczuk recognizes, however, that the strategy has at least one very positive today. "It was useful to hold the Real appreciation, and from now on, if the crisis worsens, Brazil will have more cash, for example, to lend U.S dolalrs to companies. For this purpose, the strategy may make sense,"

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