NYT: U.S. and I.M.F. Lead Push for Brazil Bailout Plan (fwd)

[Robert Weissman <rob@essential.org>]

This article is important and interesting for a variety of reasons. 
Crucial to the legislative debate over funding for the IMF is the casual
mention in the story that the IMF can borrow funds if necessary to bail
out Brazil -- a claim that supports IMF critics' arguments that the IMF
does not need new money. 

Robert Weissman
rob@essential.org


September 28, 1998


Calculated Risk: U.S. and I.M.F. Lead Push for Brazil Bailout Plan


Related Articles 
Brazilians Fret as Economic Threat Moves Closer (Sept. 20) 
As Brazil Phone Stocks Dive, So Do Latin Markets (Aug. 19) 
Brazil's Economic Half-Steps (Aug. 1) 


By LOUIS UCHITELLE

       With the Clinton administration and the International Monetary
       Fund taking the lead, a package of loans for Brazil, likely to total
more than $30 billion, is gradually being put together to limit the damage
from the Asian crisis to Latin America's biggest economy. But the bailout
plan is a calculated risk: Rather than save Brazil, it could sink the 
country into deep recession. 

The stakes for Americans are considerable. The huge Brazilian economy
dominates Latin America, which in turn purchases nearly 20 percent of
America's exports and is host to thousands of American-owned factories,
whose sales and profits contribute significantly to corporate America's
bottom line. A sharp cutback in the flow of all this income, coming on top
of a similar blow from the Asian crisis, might reduce economic growth in
the United States to a crawl. 

Now that Asia and Russia have been flattened, Brazil is suddenly the new
front line in the struggle to halt the spreading financial crisis, with its 
power to pull down markets and plunge countries into recession. If Brazil 
goes down, then Europe or the United States would become the next
battlegrounds. 

"It is very clear from the statements being made by top officials in the
Clinton administration that Brazil is fundamental to the system," said
Desmond Lachman, an economist at Salomon Smith Barney, a Wall
Street firm with money at risk in Brazil. "There is just no way they can
allow Brazil to fail." 

The whole purpose of the proposed loan package is to preserve the
present value of the Brazilian currency -- the real -- avoiding the steep
devaluations that have been so ruinous in Asia. Because Brazil spends
much more on imports and other overseas purchases than it earns from
exports, it must finance these overseas purchases by continually
borrowing money abroad. That is not easy, given that foreign lenders are
increasingly nervous about putting money into any country showing signs
of difficulty. Since mid-summer, these lenders have gradually withdrawn
money from Brazil. 

The hope is that the huge loan package will reverse these withdrawals,
particularly if it is combined with austerity measures already initiated by
Brazil's president, Fernando Henrique Cardoso. Confidence in the
Brazilian economy would revive and fresh foreign money would enter the
country. 

But obstacles are looming. The U.S. government, for example, might
participate in the proposed loan package. But rather than ask Congress
for the money, the Clinton administration might ask the Federal Reserve
to make the loan from its resources, or it might tap the same emergency
fund that it used in 1994 to help Mexico through its crisis. Both
possibilities are reported to have arisen in the preliminary loan 
discussions. And both are likely to draw the ire of Republicans in Congress, 
who challenged the administration in 1994 for risking taxpayer money without
congressional approval. 

Private sector lenders are also being asked to participate, and some are
clearly reluctant. "Anything that boosts confidence in emerging markets
we would regard as positive," said Andrew Tuck, a Chase Manhattan
spokesman. "But as far as stepping up to the plate and putting up more
money, we have $4.3 billion outstanding in Brazil already, and we cannot
dig into our pockets every time someone asks for a handout." 

The proposed loan package would be openly negotiated only after next
Sunday's presidential election in Brazil, and only if -- as expected --
Cardoso is re-elected. Nevertheless, a senior Clinton administration
official acknowledged on Friday that active discussions are already in
progress with the Brazilians, the IMF, other governments and private
sector lenders. He added, however, that "the speculation about the
contents of a package are way ahead of reality." 

The preliminary loan package, according to interviews with people
involved in the talks, has taken this form: The IMF would put up $10
billion or so, borrowing the money itself if its existing reserve is
inadequate. The World Bank and the Inter-American Development Bank
would add roughly $5 billion apiece. The governments of the largest
industrial countries, or some of them, would each contribute sizable, but
so far unspecified amounts. And when these loans were in place, the
private sector lenders, as a demonstration of their confidence in Brazil,
would agree to roll over existing loans, and add roughly $10 billion. 

Still, a giant loan package may not be sufficient to save the Brazilian
economy, even if it is combined with the sort of cutbacks in government
spending that Cardoso has already initiated. The Brazilian real must also
be devalued, this argument goes, by 15 percent or more. 

The reason is that the real is overvalued. An American-made toothbrush
that sells in the United States for perhaps $1, sells in Brazil for the
equivalent of 75 cents, while a Brazilian-made toothbrush sells in both
Brazil and the United States for more than $1. No wonder foreign goods
flood into Brazil, swamping Brazilian exports. No wonder there is so
much demand for foreign loans to finance the resulting trade deficit. 

No one is more outspoken on this issue than Jeffrey Sachs, director of the
Harvard Institute for International Development, and a persistent critic of
IMF practices. The proposed loan package is fine, he says. So are
Cardoso's austerity measures. But neither will work without a 25 percent
devaluation of the real. Many economists agree with Sachs in principle,
but favor a smaller devaluation, say 15 percent. 

"The Brazilians are suffering today from slow economic growth," Sachs
said, "in part because they have been trying for months to defend an
over-valued currency." 

The issue is interest rates. In the midst of a worldwide financial crisis,
foreign banks and other foreign lenders have grown increasingly reluctant
to put money in a country that might soon have to devalue its currency.
Brazil's hard currency reserves have dwindled to $50 billion from $75
billion in recent months as foreign money is withdrawn from the country.
And part of the $50 billion could soon depart, as repayment for $49
billion in loans from foreign banks that have come due this year. 

To keep the money in the country -- and also discourage Brazilians from
converting their reales to dollars and depositing billions abroad --
Cardoso has doubled interest rates since midsummer, to more than 40
percent. At so high a level, Sachs argues, economic activity is
discouraged and the already sluggish Brazilian economy will soon find
itself in a severe recession. Devalue the currency, he says, and interest
rates can be lowered. 

The IMF and the Clinton administration are counting on the giant loan
package, along with Cardoso's spending cutbacks and the high Brazilian
interest rates to restore the confidence of foreign lenders before a
recession can take hold. They resist devaluation on two other counts. It
would end Brazil's fixed exchange rate, and that could frighten Argentina,
and even Hong Kong -- two other countries still keeping to fixed rates. 

And, they say, while the real may indeed be overvalued, any attempt at a
limited devaluation could get out of hand in the current panicky
environment. The real would then plunge in value, bringing the Asian crisis
full-force to Latin America.