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Thursday, October 09, 2008 1:52 PM

Latin American Banks Attempt to Save Currencies

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We have now come full cycle. Money poured into Latin America and places like Iceland driving their currencies to insane levels vs. the US dollar.

Let's take a look at Iceland before moving on to currency intervention by numerous countries in Latin America.

Reuters is reporting Iceland PM asks public not to take out lots of cash

Iceland's prime minister asked the country's savers on Thursday not to withdraw large amounts of money from the banking system.

"I want to emphasise ... that people remain calm and understand that the transaction system is fully functioning and depostits are safe," Haarde said.

"I also ask the public not to withdraw large sums of money from the banks. It will make things more difficult."
Iceland seizes Kaupthing and closes stock market

The Times Online is reporting Iceland seizes Kaupthing as meltdown continues
Crisis-hit Iceland has taken control of Kaupthing, its biggest bank, and suspended trading on its stock exchange for two days.

With the nationalisation of Kaupthing, the Icelandic Government now has control of all three of the country's big banks — Kaupthing, Landsbanki and Glitnir — as it struggles keep a lid on the panic.

The OMX Nordic Exchange Iceland said it will not re-open until Monday, due to “unusual market conditions." Meanwhile trading in the Icelandic crown ground to a halt.

As Iceland abandoned efforts to shore up its currency and concentrated on efforts to secure a financial lifeline from Russia, Geir Haarde, the country's Prime Minister, said that Iceland was probably paying the price for punching above its weight.

"What we have learned from this whole exercise over the last few years is that it is not wise for a small country to try to take a leading role in international banking,” he said last night.
Iceland Learned Something

"What we have learned from this whole exercise over the last few years is that it is not wise for a small country to try to take a leading role in international banking.

Well, at least Iceland learned something.

It does not seem like Bernanke and Paulson have learned anything yet. Evidence of that can be seen in the continual Cancerous Activity of the Fed and Treasury.

Latin American Banks Attempt to Save Currencies

Bloomberg is reporting Latin American Banks Use Reserves to Save Currencies.
Latin American central banks are being forced to draw on record foreign reserves built up during the six-year commodities rally to stop their currencies from sinking in the worst financial crisis since the Great Depression.

Brazil sold dollars for the first time in five years and Mexico sold $2.5 billion in the spot market between yesterday and today, helping their currencies pare losses. Chile may follow suit, Barclays Capital analyst Rodrigo Valdes said.

The worst currency meltdown in Latin America since the emerging-market economic crises of the 1990s is causing companies' dollar debts to swell as well as sparking derivatives losses, and may stoke inflation. The decision to intervene came after central banks in the U.S., Europe and Canada cut interest rates in a coordinated effort to boost confidence.

The real is down 29 percent since reaching a high of 1.5545 per dollar Aug. 1. Brazil's central bank didn't say how much it sold in the four dollar auctions it has held since yesterday.

The Mexican peso fell 0.3 percent to 12.3589 to the dollar. Yesterday the peso at one point fell the most since 1994, when President Ernesto Zedillo was forced to devalue to avoid depleting the country's reserves.

Controladora Comercial Mexicana SAB, the owner of supermarkets and Costco stores in Mexico, fell 44 percent yesterday after saying the peso's plunge increased the cost of its foreign debt "significantly." Grupo Industrial Saltillo SAB, the Mexican auto parts and building materials company, asked the local exchange to suspend trading of its shares before announcing it will take a $48.5 million charge related to derivatives.

Brazil's central bank last month raised the benchmark overnight rate for a fourth time since April to rein in inflation, which quickened to 6.25 percent in September. The target is 4.5 percent plus or minus two percentage points.

Mexico and Chile already busted their targets. Chilean consumer prices rose 9.2 percent last month from a year earlier, more than triple the bank's target of 3 percent. Inflation in Mexico quickened to 5.57 percent in August, above the 4 percent upper end of the target band.

"There's a very high chance" that the Chilean central bank will intervene to strengthen the peso, said Gabriel Casillas, an economist with UBS Pactual in Mexico City. The bank "will be feeling quite uncomfortable with the peso at this level."
News For Interventionist Clowns

I have news for those interventionist clowns. Selling U.S. dollar reserves in an attempt to boost currencies simply will not work. All it will do is squander reserves, making matters far worse.

Actions by Central Bankers everywhere are now extremely counterproductive.

Mike "Mish" Shedlock
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