Brazil: Look who’s got a Sovereign Wealth Fund

The FT reported today that Brazil, fattened by newly found oil reserves and a sky-high oil price, is getting into the Sovereign Wealth Fund (SWF) game. They are ready to fund $200 billion toward this project and have built up the currency reserves to begin making that move.

To date, most SWFs have been in Asia or the Middle East. Now, add Latin America to the list of regions with resource- and cash-rich countries able to start their own state-sponsored bankrolls. On the other hand, the U.S. over-leveraged itself in a financial orgy whose chickens are coming home to roost in the form of a gaping current account deficit, low interest rates for savers, high inflation and a weak currency. The dollar has weakened and interest rates remain below the inflation rate in the US.

So, foreign governments, holding massive amounts of dollars in their central banks’ coffers, are looking to get a little extra bang for their buck than low-yielding U.S. treasurys can provide.

As the U.S. debt crisis becomes ever-more severe, more U.S. institutions are likely to go cap in hand for a bailout from foreign SWFs. Hey, maybe Lehman can get bailed out by the Brazilians. Instead of a Latin American debt crisis, it looks more like a North American debt crisis today.

Talk about coming full circle.

The Brazilian government plans to use revenues from newly discovered oil fields to create a sovereign wealth fund containing as much as $200bn-$300bn in the next three to five years, Guido Mantega, finance minister, has told the Financial Times.

Mr Mantega said a bill to create the fund would be sent to Congress as early as this week under a fast-track system that gives legislators a maximum of 45 days to consider the bill and approve or reject it.

The SWF would initially resemble a fiscal stability fund, setting aside 0.5 per cent of gross domestic product, or about R$14bn ($8.6bn, €5.5bn, £4.4bn), as a counter-cyclical contingency reserve. It would invest in locally issued government debt, reducing the debt held by the private sector and in effect lowering the net burden of public debt, currently about 41 per cent of GDP.

“The fund will start small but once the oil begins to come in it will grow quickly, to $200bn or $300bn in three to five years,” Mr Mantega said in an interview on Friday.

–Financial Times, 9 Jun 2008