UPDATE: Brazil Foreign-Currency-Credit Auctions To Start Mon

(Updates with details from central bank, mkt reaction)

BRASILIA (Dow Jones)--Brazil's central bank will begin holding foreign-currency-credit auctions Monday as a measure to help ensure liquidity for exporters, the bank said Friday.

The bank said it would offer as much as $2 billion per auction and that participating institutions could secure up to 100% of funds at each event. The bank didn't set a limit on how much credit could be offered overall through the auctions, but said that the events would be scheduled according to market demand.

The bank said the credit will be offered at the London interbank offered rate plus a spread to be determined at each auction, and the loans would have a maximum period of less than 360 days.

At the first auction, to be held at 1800 GMT, the bank will accept dollar-linked global bonds issued by Brazil with rating of A or higher as guarantees at the auctions. In subsequent auctions it will also accept foreign-exchange advance contracts, known as ACCs and ACEs.

Guarantees posted in global bonds must total at least 105% of the amount borrowed, the bank said. Gurarantees posted in foreign-exchange advance contracts must total 120% of the loan for AA-rated paper, 130% for A-rated paper and 140% of the loan for B-rated paper.

Speaking at a press conference in Sao Paulo, central bank President Henrique Meirelles Friday said the government decided to adopt the credit-auction initiative to help maintain financing for the country's export sector amid increasingly scarce credit availability.

"Brazilian companies have reported to me that the situation is severe," he said. "There is a near paralysis at times."

Meirelles said the auctions would be backed by the country's foreign reserves, which as of Friday topped $204 billion.

According to the central bank, all financial institutions authorized to work with foreign exchange in Brazil will be eligible to participate in the auctions, however, they will be required to direct the credit towards export operations.

The announcement of credit auctions Friday is the latest of a series of measures Brazil's central bank has taken to boost liquidity. Since mid-September, the central bank has freed up more than 80 billion Brazilian reals ($37.9 bln) from bank reserve requirements to help irrigate local credit markets.

The central bank's decision was well received in the local currency market. Following the announcement, Brazil's strengthened to end 1.4% stronger at BRL2.115 per dollar.

Brazil has seen a thinning of short-term credit lines for exports and business operating capital over recent weeks as an effect of the international credit crunch and investor risk aversion.

According to information given by the country's National Confederation of Industries this week, the supply of export credit lines has fallen about 80% since a deepening of the crisis in mid-September.

-By Gerald Jeffris, Dow Jones Newswires; (5561) 3335-0832, gerald.jeffris@dowjones.com

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(END) Dow Jones Newswires

October 17, 2008 16:12 ET (20:12 GMT)


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