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Financial firms` responsibility for loss from `junked` Brazil bond investment

Financial firms` responsibility for loss from `junked` Brazil bond investment

Posted September. 14, 2015 07:11,   


Among the emerging BRICs countries (Brazil, Russia, India and China), which have been regarded as the locomotive for the world economy in the early-mid 2000s, Brazilian economy is shrinking. The International credit rating agency Standard and Poor’s downgraded Brazil’s sovereign rating to junk-grade BB+ on Thursday, for reasons of the nation’s deteriorating fiscal position, the economic growth slowdown and political chaos. S&P’s downgrade to junk is now sending ripples across the global financial market. Values of Brazilian currency real and sovereign bonds had plummeted and a massive outflow of foreign capitals is accelerated. Following the recent "China risk" where Chinese financial and real economies were shaken, the situation in Brazil caused concerns on the emerging economies in general and increased uncertainties in the Korean financial market.

Since his inauguration in 2011, Brazilian President Dilma Rousseff has pursued financial policies to increase investment in the public sector instead of reducing wasteful public spending, which pushed the public sector’s debt ratio compared to GDP up to 64 percent The real growth rate contracts by 2.5 percent this year and is projected to be a contraction of 0.5 percent, being expected to be below zero for two consecutive years. To make matters worse, the sharp plunge in commodity prices has dragged down the already faltering Brazilian economy, highly depends on commodity exports.

Brazilian sovereign bonds sold in Korea amounts to 6 trillion won (approx. USD 5.076 billion) and 90 percent of them are presumably owned by individual investors. Domestic stock companies and asset management firms have attracted investors who were disappointed by low-interest rate trends to invest into Brazil’s national bonds since a few years ago, claiming that the yields would be around 10 percent per year. However, the rates of return from Brazil funds are hovering minus 30 percent. Given the foreign exchange loss due to plummeting value of real, not a few investors have lost half or more of the principals. As the Brazil’s credit rating was recently cut to the junk status (non-investment grade), their losses are likely to snowball.

This case where investors and financial firms rushed to invest into the Brazilian sovereign bonds forgetting the lessons-learned that high return involves high risk has revealed that Korean financial market has not advanced much yet. As the basic principle of financial investment is "one’s own responsibility," it is hard to hold the financial firms accountable for investment failure if financial firms had not taken any illegal measures while recommending investment. But some insiders say there have been inappropriate manners while attracting investment to Brazilian bonds. The financial authority must thoroughly investigate whether financial firms have inflated expectations on the Brazilian bonds and neglected assistance for the investors to make informed decisions, while they were rushing to earn commissions.