The effective devaluation of the real and resignation of the central bank governor in Brazil yesterday will make many investors nervous that the global economy is about to embark on a re-run of last summer's crisis.
Brazil, after all, is the world's eighth largest economy and the US's biggest export market. In other words, it is absolutely enormous when compared with Russia whose problems triggered off the last round of global instability.
And yesterday traders nerves were certainly rattled. Central Bank president, Mr Gustavo Franco, one of the architects of Brazil's four-year economic recovery and the staunchest defender of the country's controversial foreign exchange policy, asked to resign. Then the government announced a de facto devaluation of the currency.
The dollar slipped against the yen and the euro, while European stock markets lost 4 to 5 per cent, with Spain's the hardest hit. Financial stocks were also hit as investors worried about a forthcoming credit crisis with banks unable to lend and burdened by further bad debts.
But this crisis is different to Russia. First it has been a long time coming and there is a sense that we have been here before and survived. As far back as last summer there was mounting concern that a devaluation of the real could spark a round of devaluation in Latin America, a development which many believed would have sent Wall Street over the edge.
But on that occasion the markets were rescued by a record IMF package worth some $41.5 billion (£35.5 billion) to Brazil as well as cuts in US interest rates which shored up equity markets.
Despite this Brazil has always remained on the danger list and nearly all analysts who have predicted a return to buoyant equity markets have added the rider "unless Brazil devalues". This worry has mounted in recent weeks as one large Brazilian state threatened to default on its debt.
But now that the crunch appears to have come it may be that the worst will not come to pass. The worst case scenario is that Brazil follows the lead set by the Far East in 1997 when devaluations in the region were followed by panic withdrawals of money and severe recessions which are still having repercussions around the globe.
This well-worn path would see the fall in the real being followed by drops in the currencies of Mexico and Argentina followed by the so-called flight to quality. In other words bonds would benefit and long-term interest rates would fall in the US and Europe. This could put pressure on the Hong Kong dollar peg and even on the Chinese to devalue the yuan. Credit spreads globally would widen further leading to the long-feared credit squeeze and then global recession.
But according to Dr Dan McLaughlin, chief economist at ABN-Amro, the most likely outcome will probably be more benign. "The devaluation could be seen as a once-off and the Brazilian authorities capable of defending the new level," he said. On top of that traders are now more secure that if the worst comes, the US Federal Reserve will always cut rates again and thus jump to the rescue.
As a result, the fall-out from Brazil may simply be an early new year present for consumers in the US and Europe who may benefit from even lower borrowing costs as the Fed and possibly the European Central Bank cut rates again to avert crisis.
However, much will depend on the credibility of the new floor set by the Brazilian authorities for the currency. And perhaps the worst part of yesterday's announcement was the sense of panic which was seen to be emanating from Brazil. As Dr McLaughlin points out, this did not appear to be a controlled or orderly devaluation ordered by a government which felt fully in charge.
Rather, rumours first circulated about the central bank governor's resignation, then there was confirmation, before the government reluctantly announced that it was effectively devaluing the currency, changing its tactics of the past four years.
The initial reaction was, of course, panic. But some markets did come back on reflection. Much will depend on the reaction of Wall Street, not only last night but over the next few days and on the nerves of the Brazilian authorities.
The initial Far Eastern devaluations in 1997 which foreshadowed the current crisis were certainly planned. But the sheer weight of money employed by speculators ruined the various governments' plans. Brazil's foreign exchange reserves are of course huge, but they are far smaller than they were before this crisis began last summer. And if the real should founder under fierce and consistent speculation, the impact will almost inevitably begin to spill over into other economies. But there is hope that yesterday will be seen as simply a badly handled devaluation of a currency that many believed was overvalued anyway.
