Brazil’s reserves now over $300 billion

Brazil’s international reserves passed the symbolic landmark of $300 billion on February 9.

High reserves are seen, by the international financial community, as a sign of strength. According to conventional wisdom, they translate into liquidity and the ability to confront financial crises; especially when a crisis turns into a speculative attack on one’s currency.
However, maintaining reserves has a cost for Brazil, which is basically the difference between the country’s domestic interest rates and yields obtainable abroad. According to the Central Bank, that difference, at more than 10 percentage points, means that Brazil’s international reserves cost the country over $24 billion last year (there are other costs: of emitting bonds and paying commissions, for example).

Brazil’s reserves closed out 2010 at $288.6 billion. Since then the Central Bank has continued to accumulate reserves as dollars flood into the country. Foreign investors are attracted by the higher return on their money (the 10-percentage-point difference). The dollar torrent strengthens the real and weakens the dollar, in accordance with the laws of supply and demand, which is detrimental to Brazilian exports.