Brazil's Central Bank Faces Inquiry Over Corruption

REGULATORS

BRASILIA--The Brazilian senate last week launched an inquiry into allegations of corruption surrounding the devaluation of the real in January.

The investigation will examine charges that central bank officials accepted bribes from local investment banks and gave them advance warning of the decision to float the currency, according to sources.

In a week of extreme upheaval at the start of the year, the Banco Central do Brasil first attempted a controlled devaluation of the real on Wednesday, January 13.

However, it was forced to allow a free float on Friday, January 15, following the widescale repatriation of foreign funds.

The currency, which had been trading around BRL1.19 against the US dollar in early January, hit lows of BRL2.19 in the days and weeks following the float.

At the time, the decision provoked considerable disagreement between senior bank officials, and led to a spate of departures.

The resignation of central bank chief, Gustavo Franco, was immediately followed by the appointment of his deputy, Francisco Lopes.

He, in turn, soon resigned to be replaced by Arminio Fraga, a former employee of George Soros's Quantum fund.

Allegations

The allegations of corruption include claims that a former president of Banco Marka, the Rio de Janeiro-based investment bank, paid a central bank insider $125,000 per month for preferential treatment and exclusive information regarding the currency flotation.

This included advanced warning of the devaluation and the opportunity to buy US dollar futures at lower than market rates on January 14, the day before the free float.

Another Brazilian firm, Fonte Cindam, has also been implicated.

However, both banks deny the charges.

To spearhead the investigation, a Parliamentary Commission of Inquiry has been set up. Senator Jader Barbalho has been nominated to run the investigation.

An internal inquiry has also been launched by the Banco Central do Brasil in conjunction with the federal police.

Fraga, who took over as president of the central bank at the beginning of February, is expected participate in the enquiry as a witness.

Since the devaluation, the Brazilian economy has made a surprisingly strong recovery, and the real was trading at around BRL1.65 in the middle of last week.

Sources in New York note that FX desks at several major US institutions have made huge windfall profits on the back of the Brazilian devaluation in January.

Although, foreign investors are remaining cautious about the political and economic environment.

--Robin Pagnamenta

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