IMF Warns of Brazilian Asset Bubble

By Jaylan Boyle, Senior Contributing Reporter

RIO DE JANEIRO – Chief of the International Monetary Fund (IMF), Dominique Strauss Khan has handed down a warning to Brazil, among others nations, that there is a very real risk of an ‘asset bubble’ developing in the emerging economies of the world.

An asset bubble (sometimes referred to as a speculative bubble or speculative mania) can occur when investment pours into an economy, which in turn inflates the price of goods far beyond their ‘real’ value. However an occurrence of an economic bubble can sometimes only be pointed to in retrospect, after prices have experienced a sudden readjustment back to their intrinsic values.

Avoiding the worst of the recent economic crisis, which most commentators agree is now over in Brazil, may have been Brazil’s fortune. However as one pundit put it, ‘definitely in the rear view mirror, the Brazilian stock market dropped along with those of most of the rest of the world.’ Nonetheless like other emerging economic powers such as Indonesia, Brazil has now experienced a surge in investment that could leave the economy vulnerable.

The government seems also to have recognized the dangers of the current climate, with the announcement this week that the central bank is preparing to withdraw the economic stimulus measures that were employed at the onset of the recent crisis. Such measures in particular included heavy subsidization programs. In real terms, the central bank is demanding that private institutions be required to deposit more money with them, to the tune of an additional R$71 billion in total.

However there is speculation that the October presidential elections could affect any measures the central bank plans to enforce, something that the bank’s Governor Henrique Meirelles has vociferously denied. “Acting in a consistent manner means not avoiding discussions that are technically justified, which in the short-term could seem unfriendly or unpopular, but that aim towards a common good… As such, those who expect changes in the central bank’s conduct as a function of the electoral calendar are mistaken.”

It has been the stated policy of the IMF in the past to discourage such measures, called capital controls, from being exercised. However in a recent statement the organization backed down somewhat from this stance, calling intervention a ‘legitimate part’ of policy options open to governments. This comes with the proviso that the use of these interventions, should they become widespread, could have an unsettling effect and create imbalances in the world economy.