Brazil in the 2000's: financial regulation and macroeconomic stability

Abstract

The turbulences that hit repeatedly the international economy in the second half of the 1990s caused much damage to the Brazilian economy. A few months after the country achieved price stability with the Real Plan (named after the new currency introduced in July 1994), the Mexican crisis of 1994/5 led to a 'sudden stop' in the flow of international finance to Latin American countries. Brazil, already suffering from a fastwidening current account deficit, endured a balance of payments crisis that forced the Central Bank to impose a steep rise in interest rates to try to stop capital flight. Rising interest rates were added to the loss of inflation revenues to cause the banking crisis of 1995, which led to the disappearance of three among the ten largest private banks in operation, plus the failure of a large number of medium and small financial institutions. In parallel to these developments in the private banking sector, two of the largest stateowned banks in the country were also in dire straits and suffered intervention by the Central Bank, although for different reasons.