Opinion: Global Foreign Exchange Manipulation Affecting Real

Opinion, by Leonardo Wetzel

RIO DE JANEIRO, BRAZIL – The U.S. Department of Justice recently revealed that several banks, including five of the world’s major banks (Barclays, Citibank, JP Morgan, Bank of America, UBS, Royal Bank of Scotland and more) were involved in the manipulation of global currencies exchange and interest rates including the Brazilian real.

The banks were imposed US$5.7 billion fines by the U.S. Department of Justice after pleading guilty to antitrust violations. They allegedly worked together to enhance their profits by manipulating the US$5-trillion-a-day foreign exchange market to US$10 billion. Part of the evidence was discovered in an invitation-only online chat room known as “the cartel”, a name that was also used by U.S. prosecutors to describe the plotters.

Felony charges were brought against American banks by U.S. authorities for the first time in a while, despite efforts to blame it all solely on the scheme’s individual operators. The bank operators would get strong positions in the currencies and set up time frames among themselves to get rid of or purchase them heavily and drive prices. They also arranged to not use local operators in their dealings.

The Brazilian real exchange rate was apparently more strongly affected than other global currencies between 2008 and 2012. Although the local press in Brazil was more concerned with the micro and macroeconomic implications of the real’s exchange rate tangling, interest rates manipulation might help clarify a standing doubt of local economists: How despite having better credit ratings than some countries, Brazil still ended up with higher real interest rates. The revelation might have helped to shine a light on the issue.

Some unorthodox Brazilian economists and their counterparts in the BRICS, have already been claiming for a while now that the three big credit rating agencies (Standard & Poors, Moody’s and Fitch Group) don’t base their ratings on strictly technical criteria. They would rather either sell ratings to big players (like the investment banks where most of the agencies’ personnel come from) or with a political agenda.

As a response to that, a new BRICS credit rating agency is coming to challenge the monopoly of the big three. This recent scandal, and the way it is being handled, with fines smaller than profits going straight to the U.S. treasury, might only give them more political clout on the public debate in Brazil.

The revelations comes at a time where Brazil seems to have little political room to maneuver at domestic economic issues and at a time of economic downturn. With Congress dominated by conservatives, and with little space even inside the Ministry of Finance to implement progressive income and rentism taxation to stem away from corporate taxes at the productive sector, which would be desired by Worker’s Party congressmen, but was already dismissed by Minister Joaquim Levy.

The government may need to try to get foreign incentives and make changes to its economic landscape. China is already set to invest R$53 billion in Brazilian infrastructure, the largest of such foreign investments in the history of Brazil. And now Russia and China are pushing the agenda for alternative international financial institutions to stem Brazil away from the U.S.-western led IMF and the big three American credit rating agencies.

The new scandal has yet to show if the U.S., UK and Switzerland authorities include clarifications or compensations for the other countries involved. It also gives the impression that the U.S. dollar led exchange operations are concentrated on the hands of a few operators that can easily skew the system without much further consequences or accountability.

This might be yet another factor for Brazil to get stronger presence on a new international BRICS led finance system in order to be less exposed to U.S. dollar based manipulations of its currency on international investments, which are even hurting trade. China is already the biggest commercial partner of Brazil, and the distance with the U.S. might be set to increase, now also on foreign investments balances.