CSM: Brazil Bailout for US banks (fwd)

[Robert Weissman <rob@essential.org>]

The Christian Science Monitor 
                            November 9, 1998, Monday 

SECTION: OPINION/ESSAYS; Pg. 11 

HEADLINE: Brazilian Domino Effect? 

BYLINE: Carlos Lozada 

   Brazil is widely regarded as the latest pressure point in the ongoing 
global financial turmoil. 
  
Conventional wisdom suggests that if the fiscal adjustments recently 
announced by President
Cardoso become bogged down in the Brazilian congress, investor confidence 
would erode, and
reserves dwindle - eventually compelling Brazilian authorities to devalue 
the real. The result would be
further stress for Brazil's already contracting economy, and a return of 
inflation. A Brazilian crisis
might make Argentina the next domino, as Argentina's fixed exchange rate and 

heavy trade
dependence on Brazil are often cited as key vulnerabilities. 
  
If Brazil and Argentina go, then could Mexico and the rest of Latin America 
be far behind? 
  
And would a crisis in that region render the US economy increasingly 
vulnerable to an extension of
the Asian collapse? 
  
The domino-style argument is the rationale behind the sizable assistance 
package for Brazil currently
being cobbled together by the International Monetary Fund, the World Bank, 
and the US
Treasury, among other international actors. 
  
Most analysts foresee a package of at least $ 30 billion. 
  
How could a crisis in Brazil affect the United States? 
  
US-Latin American trade links are often cited as a potential channel of 
contagion. 
  
Indeed, Latin America accounts for nearly 20 percent of US export earnings, 
and Brazil is the
largest economy in Latin America, accounting for more than 40 percent of 
regional economic activity.

  
But it is erroneous to conclude that Brazil is therefore a significant 
trading partner for the US. 
  
Department of Commerce data shows that the US exported $ 134.4 billion to 
Latin America in
1997. Of this total, Mexico purchased $ 71.4 billion, or 53 percent. 
  
Brazil, meanwhile, accounted for only $ 15.9 billion, merely 12 percent of 
total exports to Latin
America, and only 2.3 percent of total US exports worldwide. 
  
Indeed, strong trade ties between the US and Mexico provided a more 
meaningful - though still
controversial - justification for the 1995 bailout of Mexico, when the US 
Treasury circumvented
Congress and provided a $ 20 billion credit line to Mexico. Commercial 
relations with Brazil are not
by themselves nearly significant enough to merit such assistance. 
  
Moreover, it is not at all clear that a downturn in Brazil should 
necessarily result in deteriorating
long-term prospects for the rest of Latin America. 
  
Even in Argentina - normally considered the economy with the greatest 
Brazil-related risk - the
evidence is mixed. 
  
While Brazil accounts for about 30 percent of Argentina's export earnings, 
the export sector as a
whole represents less than 10 percent of the Argentine economy. And even 
though Brazilian Gross
Domestic Product is forecast to contract by at least 1 percent in 1999, 
Argentina is still expected to
grow by 2 percent to 3 percent next year. 
  
Meanwhile Mexico, which sells more than 80 percent of its exports to the US, 

is much too linked to
its northern neighbor to be significantly affected by Brazil's fiscal woes. 
  
If neither trade nor regional contagion is an overriding concern, then why 
is Brazil such a worrisome
issue for US economic officials? 
  
The less-publicized answer lies in the loan exposure of US banks in Brazil. 
US banks held $ 25.6
billion in outstanding loans to Brazilian borrowers as of June 30, 1998. 
  
This is by far the largest exposure by US banks to any developing economy, 
dwarfing the
highly-touted $ 6.2 billion exposure to Russia, and more than one-and-a-half 

times the total loan
exposure to Mexico. 
  
Should capital keep fleeing Brazil, which it did at a pace of $ 500 million 
per day last month, the risk
of loan default would grow. Hence the multibillion-dollar assistance 
package. 
  
Indeed, it is little coincidence that a $ 30 billion bailout would neatly 
cover the US banks' outstanding
loans in Brazil. 
  
The need to "restore investor confidence" is the prevailing mantra in 
today's international financial
circles, and is a common justification for massive assistance packages such 
as the one being prepared
for Brazil. 
  
But increasing confidence should not be confused with eliminating risks to 
lenders by creating the
perception that the US and the multilateral agencies will open the spigot at 

the first signs of trouble,
bailouts may promote risky or reckless lending. 
  
Mexico already carries an implicit US government guarantee. Should Brazil, 
and perhaps other
economies in the future, come to enjoy the same? 

* Carlos Lozada, formerly a consultant to the Inter-American Development 
Bank, in Washington,
D.C., is an economic analyst in Atlanta.