International stock markets have suffered heavy losses following yesterday's devaluation of the Brazilian real. In Dublin the value of shares fell by £1.6 billion (#2 billion).
Brazil - the world's eighth-largest economy - is now facing a crucial test of its new monetary strategy against predicted speculative attacks and a potentially catastrophic crash that could plunge the world into recession.
The crisis claimed the head of Brazilian central bank president Mr Gustavo Franco, who resigned, saying he now saw the need for "flexibility" in setting exchange rates. Analysts warned that Brazil could follow the lead set by the Far East in 1997, where devaluations were followed by panic withdrawals of money and severe recessions which are still having repercussions around the globe.
President Clinton said US officials had discussed the implications of Brazil's move, which involved an effective devaluation of the real by about 8 per cent - before devaluation the real was worth 77 pence - with counterparts from other big economies and the International Monetary Fund. Officials from the Group of Seven nations will discuss the crisis on Saturday, on the sidelines of a conference of Asian and European finance ministers.
There were some positive signs as a recovery from early lows on Wall Street allowed many markets to regain some of their early losses. Even the Brazilian stock market - which was down 10 per cent shortly after the devaluation announcement - recovered some of its losses to close last night down 5.1 per cent.
Wall Street's improvement was driven by a recovery by technology and Internet stocks. After falling as much as 250 points in early trading yesterday - a drop of more than 2.5 per cent - a flood of buying of high-technology stocks brought the sharp recovery on the New York market. However, stocks other than Nasdaq heavyweights like Intel and Yahoo were slower to recover losses. At the close, the Dow Jones Industrial Average was down 125.12 points or 1.32 per cent and renewed volatility characterised late trading.
European stock markets suffered heavy losses of between 3 and 5 per cent, although Wall Street's performance allowed most to recover from early lows. The London and Frankfurt markets have now lost all of last week's big gains, although markets like Paris and Dublin are still marginally ahead of their end-1998 levels.
In London, the FTSE-100 index was initially down as much as 5 per cent before the rebound in New York allowed it to regain substantial ground. But it was still down 3 per cent at the close, recording its biggest single-day decline in both points and percentage terms since December 1st.
The Frankfurt and Paris markets fell by almost six 6 per cent in early trading, before the later recovery left Paris down 3.5 per cent and Frankfurt down 4.1 per cent.
The pattern in Dublin was much the same, with the market down 3.5 per cent in early trading before a modest late recovery left the ISEQ Index down just over 3 per cent on the day.
Brazil on brink as speculators circle the devalued real; Jane Suiter's analysis: page 21
Editorial Comment: page 19