Tuesday, 17 March 2009

Brazilian Companies Understand Reality Better Than Government: Corporates Bound to Create Derivatives Risk Alert Mechanism

This is the news of the month, or the year -- despite it is signalling only an intention to do something (good.)

Self-regulation works well if inflicted or sparked or triggered by fear (or embarrassment.) Brazilian companies finally became conscious of the danger of exposing their balance sheets excessively to toxic derivative structures such as those loans in reais that locked up lower-than-market rates betting on an ever-lasting dollar drop. Now, they are taking a first step to create a risk-alert mechanism similar to the credit risk-related one implemented by the central bank. It was an idea of companies themselves -- not President L.I.L.D.S. (a.k.a. Lula!) who in his infinite knowledge thought of it. Someone was ahead of Brazil's Messiah -- for the first time.

The other day, the local media unveiled a central bank classified report that calculated the notional value of corporate losses stemmed from gone-awry derivative contracts at $30 billion. The report said banks have all counter party risks under control. So far we have no information on losses in corporate balance sheets for the fourth quarter of 2008 -- market rumours put the situation as serious for some sectors such as ethanol, food processing and soybean crushing. Remember the scandal we have reported extensively here in this blog, the one that led Sadia to put itself up for sale (even as the board doesn't admit it,) and VotorantimCelulose to acquire Aracruz -- creating the most leveraged company in the paper and pulp industry in the world!

Well, Corporate Brazil (a reason of pride for Brazil, not of shame as the Lula administration wants to portray it) is seeking to prevent future problems. That is why the Brazilian Banking Association (Febraban) led the effort of creating this risk alert mechanism with Cetip, the biggest clearing house (90 percent of derivatives transactions are cleared through Cetip.)

No comments:

Post a Comment