• by IPS Correspondents (rio de janeiro)
• Tuesday, November 22, 1994
• Inter Press Service

RIO DE JANEIRO, Nov 22 (IPS) - Brazil's leading stock exchangesRio de Janeiro and Sao Paulofell Monday and Tuesday as investors became hesitant in the face of six small bank closings in 10 days.

The Sao Paulo exchange, fell 4.85 percent on Monday, and another 5.6 percent before noon Tuesday, while the Rio market registered a 4.9 percent drop Monday and 4.4 percent by noon Tuesday.

Investors became wary when the Central Bank ordered the liquidation of the Atlantis bank - the sixth small Brazilian bank to suffer this fate in the past 10 days.

The banks' failure is a direct result of Finance Ministry measures to diminish liquidity in order to reduce consumption and contain inflation.

Financial institutions with eight to 20 million dollars in capital, but with operations between 40 and 50 million, are particularly vulnerable to the capital shortage.

According to analysts, the current situation is also a result of the proliferation of small banks that began to appear in 1989 to take advantage of the easy profits generated by runaway inflation.

"In a situation where credit has become expensive and scarce, large banks withdraw the credit lines that financed the smaller banks and, if the latter do not have a solid foundation, they fall," said Raul Pereira Barreto of the Sao Paulo Merchant Bank.

He added that the wave of rumours that has beset the financial market is potentially worse than the financial strangulation of small banks.

"Credit is a relationship of trust. When rumours that a small bank is in trouble begin to flow, larger banks stop dealing with it, leaving it even weaker," he said.

Former Central Bank President Gustavo Loyola Brandao - now a financial counselor - said the situation would repeat itself with other banks, because the extreme inflation that once allowed small banks to flourish by using credit from larger banks no longer exists.

He stressed that "it is important to remember that these are localised problems which do not affect the larger institutions."

Analysts' primary concern is the possibility of a "domino effect," as market sources have mentioned as many as 15 small banks that may be in danger of collapse.

© Inter Press Service (2014) — All Rights Reserved. Original source: Inter Press Service

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