Calm in face of real uncertainty

David Fenwick, partner and head, Linklaters

Stirling Leech, partner, Clyde & Co

Andrew Ballheimer, partner, Allen & Overy

THEY have an awful lot of coffee in Brazil. Unfortunately, they also have an awful lot of economic and financial problems which threaten a truly global recession.

Brazil's currency, the real, is weakening further after its recent 8 per cent devaluation, investments are plummeting, and Brazil's economic strategy is in tatters. Fears are that Latin America's biggest economy could plunge back into the hyper inflation and recession of the early 1990s, dragging the region and the fragile US economy down with it.

The future is uncertain. Domino effect or not, one thing is for sure: the economies, banks, and big companies of Britain and Europe are exposed to Brazil's fortunes, together with law firms with big Latin American practices – including Linklaters, Clifford Chance, Richards Butler, Clyde & Co, and White & Case, most of which have offices in Brazil.

David Fenwick, securities partner and head of Linklaters' office in Sao Paulo – Brazil's industrial centre – says: "It's hard to tell what will happen next. Brazil has been in very difficult circumstances, partly as a result of the spillover of the crisis in Asia and partly because of its structural economic problems. Before the real was introduced in 1994, Brazil had five different currencies in as many years and inflation ran at 100 per cent a month. Since then there has been a financial stability, but also political uncertainty as the government is split over reforms.

"There was a huge sigh of relief in the industrial sector last week, when devaluation meant cheaper exports. But that is a simplistic analysis. The real remains unstable and if inflation takes off again, that will be very bad for the economy.

"There's a huge need for international finance in Brazil. For law firms already there, I can't see the problems affecting their long-term plans. Brazil has huge potential, and the demand for legal services here is immense."

Stirling Leech, Clyde & Co partner heading the firm's Latin American department, says: "The Brazil situation is serious, but more so for some people and less so for others. For businesses with investments there, and assets in the local currency, there is a serious problem. Litigation is beginning to arise from certain business contracts that are unfulfilled, or projects that are not being continued. Whether the crisis is just the start of worsening global turmoil is hard to say, as we've seen problems in Brazil before, and the country has recovered. There's a good chance that it will not seriously affect other countries in the region.

"As a lawyer, I feel reasonably relaxed about the situation. I'm due to go there next week to see clients and find out more about what's happening, but I think there will be more legal work because of it. In terms of fees, international law firms without local offices will be billing in sterling or dollars, so their services will become more expensive for local clients."

Andrew Ballheimer, senior capital markets partner at Allen & Overy in New York, says: "The next three months are critical to the future of Brazil's economy. The markets had started to open up since the election of the current president four or five years ago. Now, the question is, is the economy sustainable? Brazil is at a pivotal point. It has to show the political will to make tough decisions and keep things on track."

What about the global threat?

"The US economy is still booming, but is incredibly exposed to Brazil, which is why the Americans are in the forefront of the IMF talks. Clients are already scaling back their presence in the Latin American capital markets, there's a slowdown in corporate funding, and problems on repayment dates are emerging. Brazil is very important to the global economy.

"We do a lot of business in Brazil but have not yet opened an office there. There's no point in having a presence until the markets look sustainable."