UPDATE 2-Brazil trims reach of 6 pct tax on foreign loans

Thu Jun 14, 2012 8:06am EDT

* Brazil cuts scope of tax to fight global turmoil

* Move comes amid fears over extent of euro crisis

* Partially reverses tax, scope hike made in March

By Guillermo Parra-Bernal and Natália Cacioli

SAO PAULO, June 14 (Reuters) - The Brazilian government on Thursday reduced the reach of a financial transactions tax on foreign loans to Brazilian corporations, seeking to protect local credit markets from the impact of global financial turmoil.

Foreign corporate loans of up to two years will pay the so-called IOF tax, which remained unchanged at 6 percent, according to a presidential decree published on the official gazette. Previously, the tax was levied on loans of up to five years.

The move comes as the government seeks to revive the economy amid fallout in the euro zone, where some nations are grappling with their steepest crisis in decades. In recent weeks, banks and investors have shuttered access to funding to all but the most creditworthy Brazilian companies, just at a time when local activity slows dramatically.

Brazil's currency, the real, has shed 20 percent against the U.S. dollar since March, when investors began to step up bets against the resolution of a debt crisis spanning from Greece to Spain to Italy. The real has shed 11 percent so far this year.

"This comes in response to the authorities' heightened concern regarding the global economy," said Alberto Ramos, head Latin America economist with Goldman Sachs Group in New York. "Furthermore, the announced changes also indicate that the government is likely comfortable with the currency trading" in a range between 2 reais and 2.1 reais per dollar.

The IOF move takes effect immediately. A finance ministry spokeswoman in Brasilia declined to comment on the decision.

Large and mid-sized companies facing increased difficulties to raise funds in the domestic credit markets should benefit from an ease in restrictions on foreign borrowing. Thursday's measure follows a decision on May 23 to remove the IOF tax on the purchase of derivatives instruments for exporters.

INEFFECTIVE

Most economists saw the imposition of the IOF tax on foreign loans as ineffective at the time, because its scope failed to cover the bulk of corporate borrowing by Brazilian banks and companies -- which tends to fall between five- and 10-year maturities.

The government has "started to peel off some of those layers to not only contain volatility ... but, perhaps more pressing, to relieve pressure on medium-to-longer term financing for Brazilian companies," said Flavia Cattan-Naslausky, a strategist with Royal Bank of Scotland Securities in Greenwich, Connecticut.

In an interview published by newspaper O Globo on Wednesday, Finance Minister Guido Mantega said either removing the IOF tax on foreign loans or reducing its scope was "the first on the list" of possible measures to ease a squeeze in corporate funding.

The government first imposed the 6 percent IOF tax on loans of maturities of more than two years last March in an attempt to slow dollar inflows that have driven up its currency and threatened a fragile economic recovery at the time.

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