Incessant government meddling pushing Brazil back into bear mode

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Once considered "market friendly," Brazilian President Dilma Rousseff has started to unnerve investment banks and drive the Bovespa into a deep correction. Expect downgrades and maybe a few bottom feeding opportunities.

[caption id="attachment_56850" align="alignright" width="300" caption="Brazilian president Dilma Rousseff"] Image courtesy the Brazilian Ministry of Culture: http://www.flickr.com/people/ministeriodacultura/ [/caption]

Dilma has the analysts running scared. Most old Brazil hands expect a lot of government interference with Vale ( VALE , quote ) and Petrobras ( PBR , quote ), which state-run pension funds control .

But her recent efforts to force private banks to lend against their own policies take things to a whole new level.

The government doesn't control a bank like Itau ( ITUB , quote ), but it can direct its own lenders to loosen their standards. If the private institutions want to compete, they have to follow the lead or risk irrelevance -- or even, theoretically, regulatory reprisals.

ITUB shares are off a full 30% since the local market peaked in early March. VALE and PBR aren't doing much better, and because these three stocks account for 35% of broad Brazilian funds like EWZ ( quote ) between them, we're now back in secondary bear market territory.

With even the central bank now feeling the pressure to issue press releases reminding the world how "independent" it is, you have trouble.

Central banks need to be independent for modern markets to work. Even questioning whether Brazilian rates are moving in the best interest of the economy or to serve government policy makes the entire exercise moot.

Look for sweeping downgrades from brokers -- now that Brazil is down 20%, nobody wants to admit that they kept a "buy" rating on this market.

Wait a bit for Wall Street to truly capitulate here, and then things start getting interesting.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , International , Stocks

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