Is Brazil About to Drag Down Spain’s Biggest Bank?
The timing could not have been worse.
In July last year, an analyst working for Banco Santander Brasil did something he shouldn’t have. He warned the firm’s private banking clients about the economic risks posed by the reelection of Brazil’s scandal-tarnished president, Dilma Rousseff. Those risks included a sharply devalued Brazilian real, rising interest rates, runaway inflation and tumbling shares.
When the analyst’s report went public, it provoked outrage from Rousseff’s party, which saw it as a direct intervention in the country’s general election. Santander’s now-deceased CEO Emilio Botin was given a choice: either he castigated the analyst and rejected his findings, or his bank’s extremely cozy ties with the government of its most profitable market could be in danger.
It was not a difficult decision. Within days the analyst was fired for “making a mistake.” Now, a year and two months later, it’s obvious that the analyst’s warnings were spot-on. Rather than firing him, Santander should have listened to him.
Instead of reducing its exposure to Brazil’s fragile economy over the last year, as HSBC has done (read: Does HSBC Know Something Others Don’t), Santander has doubled down on its bet, forking out €4.7 billion on the acquisition of the remaining 25% of its Brazilian unit.
A Slap in the Face
The timing could not have been worse. Yesterday, Brazil’s already troubled economy was given another long-expected slap in the face when Standard & Poor downgraded the country’s debt from investment-grade to junk status.
The impact was immediate. Brazil’s currency plunged from 3.78 Real to the dollar to 3.9. It’s currently hovering at 3.88. Just a year ago, when news of the government’s Petrobras scandal began hitting and the economy’s biggest threats – a weakening China, the abrupt end of the commodity super cycle, a strengthening dollar, and floundering internal demand – were beginning to surface, the currency was clocking in at 2.35 Real to the dollar.
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