Brazilian President Dilma Rousseff slammed rich nations on Thursday for unleashing a tsunami of cheap money that was cannibalizing poorer countries such as her own, forcing them to act to protect struggling local industries.
Rousseff's words amounted to some of the highest-profile criticism to date of efforts by the European Central Bank, the Bank of Japan and others to spur their economies through low interest rates and cheap loans.
Without naming specific countries, Rousseff said these measures have damaged emerging-market nations such as Brazil by unleashing a wave of capital inflows. That has made their currencies overvalued and their exports more expensive.
Her speech, to construction executives, came hours after Brazil announced the extension of a tax on foreign loans. The move was designed to weaken the Real but it strengthened instead, highlighting the difficulties Rousseff faces as global investors, flush with cash from the cheap lending, race to invest in Brazil's high-yielding assets.
Brazil has been battling the effects of a strong currency for years but had enjoyed somewhat of a reprieve in recent months as the financial crisis in Europe made global investors more averse to risky assets. With Europe's problems now abating, the Real has rebounded more than 8% this year.
We have a currency war that is based on an expansionary monetary policy that creates unequal conditions for competition, said Rousseff, who is a career economist.
”We will continue to develop (our) country by defending its industry and ensuring that the strategy used by the developed countries to exit the crisis does not cannibalize emerging markets,” she said.
Rousseff's speech, which echoed words earlier by her Finance Minister Guido Mantega, appeared to be a coordinated effort to express dismay as central banks in the developed world keep interest rates at record lows and pour cheap cash into markets.
Banks snapped up 530 billion Euros in low-cost loans offered by the European Central Bank on Wednesday as authorities there try to resolve a debt crisis that threatens the survival of the Euro zone.
On February 14, Japan's central bank boosted its asset buying and lending scheme, under which it buys government and private debt and lends cheap funds against various types of collateral, by 10 trillion yen (130 billion dollars), to 65 trillion yen.
The government will not stand by as the currency war rages on, Mantega told reporters in Brasilia. The government will continue taking measures to prevent the Real from strengthening and hurting Brazilian production.
The new measure, contained in a presidential decree published on Thursday, extended a 6% tax known as the IOF on overseas loans with maturities of up to three years. Previously, the tax was only charged when companies in Brazil took out foreign loans maturing in up to two years.
Brazil has a long history of tweaking the IOF tax to try to limit or woo capital inflows. Mantega said the government did not plan to raise the IOF tax on foreign purchases of local stocks but stressed it has plenty of policy options at hand.
Another would be using Brazil's sovereign wealth fund to buy dollars on the spot foreign exchange market, though Treasury Secretary Arno Augustin suggested this week that such a move is unlikely soon.