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September 3, 1998
 
Brazil's market plunge adds to pre-election jitters

                  BRASILIA, Brazil (Reuters) --
                  Brazilian stocks slid to their lowest
                  level in more than two years Thursday, casting a shadow over the impending
                  general elections in Latin America's biggest economy.

                  Shares on the Sao Paulo stock exchange had tumbled 8.6 percent by the close
                  of trade after U.S. ratings agency Moody's Investor Services downgraded
                  Brazil's foreign currency debt, saying the country was more vulnerable to
                  swings in investor confidence.

                  "Whoever had any doubt the situation was terrible doesn't any more," one
                  trader said.

                  A spokesman for President Fernando Henrique Cardoso said Moody's was
                  treating Brazil unfairly.

                  "The rating agencies are being cautious, especially in the aftermath of the
                  Asian crisis, when they were caught by surprise," the spokesman said.
                  "Unfortunately, they are showing mistrust in relation to emerging markets in
                  general."

                  Difficult to attract dollars

                  Earlier Thursday, as Latin American finance chiefs gathered in Washington to
                  discuss the impact of Russia's crisis on the region, Cardoso conceded Brazil
                  was finding it hard to attract the dollars needed to plug a huge budget deficit.

                  "Is the country vulnerable? Yes. There are various aspects that we must
                  face," said Cardoso, who is seeking re-election on October 4. "We've not done
                  it all, but we have done a lot."

                  Cardoso insisted that Brazil was not about to devalue its currency, as its
                  neighbor Colombia did Wednesday.

                  "Brazil does not have the vulnerability of those countries that are basically
                  exporters of commodities," he said at a news conference.

                  The briefing was called to launch Cordoso's election manifesto, but it was
                  dominated instead by questions about the volatile markets.

                  "Russia's problems have nothing to do with Brazil," Cardoso said.

                  Cardoso favored in election

                  Cardoso is favored to win a second term next month, having slashed inflation
                  from about 5,000 percent a year in 1994, when he was elected, to an
                  estimated 1.5 percent in 1998.

                  A poll published Thursday gave him 44 percent of the vote, down 2 percent
                  from mid-August, while left-wing Luiz Inacio Lula da Silva was second with
                  25 percent, up 3 percent.

                  Despite the slight narrowing of his lead, Cardoso could still win the election
                  outright in a first round, by mustering more votes than all of his rivals
                  combined, the poll said.

                  That could change if Brazil is forced to devalue the local currency, the real,
                  which is the anchor of Cardoso's anti- inflation drive but is widely considered
                  overvalued.

                  Economists fear Brazil may lose the faith of already nervous international
                  investors. In August, the value of shares fell nearly 40 percent in the wake of
                  Russia's crisis.

                  Huge drop in foreign reserves

                  Last week, the Central Bank cut taxes on foreign investors in the hope of
                  keeping dollars in Brazil and plugging a $3 billion fall in foreign reserves, which
                  now stand at about $65 billion.

                  The reserves are Brazil's best weapon to defend the real and are still high
                  compared with Russia, which now has just $13 billion.

                  Despite the Central Bank's move, however, nearly $1.4 billion left Brazil in the
                  first two days of September. Foreign exchange traders said Thursday that
                  state-owned Banco do Brasil was selling dollars to prop up the real.

                  Urgent need for reforms

                  At his news conference, Cardoso said reform of Brazil's loss-making social
                  security system -- which has been stuck in Congress for more than three
                  years -- was needed more urgently than ever, along with an overhaul of the
                  complicated tax system.

                  "Stability depends on the reforms," he said. "We have to continue with a
                  permanent program of fiscal adjustments, not a package."

                  Cardoso reiterated a pledge not to cut spending or hike taxes after the
                  elections.

                  He also said he planned to keep his key duo of Finance Minister Pedro Malan
                  and Central Bank President Gustavo Franco, if he wins the elections.

                  Malan and Franco are Cardoso's monetary hawks, and their reappointment
                  would probably mean that public spending would continue to be kept under a
                  tight grip.

                  Other pledges in Cardoso's election manifesto include the creation of 7.8
                  million jobs by 2002, better education and health services and development of
                  Brazil's impoverished interior.

                          Copyright 1998 Reuters Limited.