[stop-imf] The coming collapse in Brazil

[Robert Weissman]

There doesn't seem to be much doubt that Brazil is headed for a major
economic crisis. Its accumulated debt is simply unmanageable, and the
date with destiny is likely to arrive sooner rather than later. The
recent IMF loan package already appears to be set to vaporize -- not so
much stolen by Brazilian elite, as US Treasury Sec. Paul O'Neill feared,
but consumed by the international capital markets. For this, Brazil will
get an increase in its overall debt, but little else. These loans -- too
often misleadingly labeled aid -- aren't use to buy things; they are
used to buy money, which delivers nothing to the Brazilian people.

With the crisis rapidly approaching, the Wall Street complex now has
three goals.

One is to use the threat of the economic crisis -- one might reasonably
say the enormous likelihood -- to tip the election away from Lula and
the left.

In the event the first goal fails, the second goal is to pressure the
next Brazilian administration, even it comes from leftist parties, to
hue the neoliberal line. Whatever administration takes over, it will be
enormous difficulties. The markets will penalize the government if
adopts sane policies; but even pursuing the market fundamentalist
approach is not likely to do anything to stem the crisis -- in fact, by
collapsing domestic demand, it is likely to make it worse.

The third goal is, when the crisis comes, to blame it on the government,
and ignore the market fundamentalist system which has brought the crisis on.

In coming days and weeks, we'll be seeing a lot more of comments like
this: 

"Even with pessimistic assumptions, they are safe through the end of the
year," says Paulo Leme, director of emerging markets economic research
at Goldman Sachs in New York. "With strong leadership and solid
management, they can still turn things around. It is now up to the
presidential candidates to assume their responsibility."


-- 
Robert Weissman



Below are excerpts from the World Bank Press Review for Thursday, August
15, 2002



================================================
Brazil Relief Rests on Hopefuls' IMF Stances  
================================================ 

Just a week ago Brazil was rejoicing in its $30bn loan package from the
International Monetary Fund, writes the Financial Times. But it is already
clear that the operation has done little to boost international investor
confidence and many observers are now asking how long and at what cost
Latin America's largest economy can hold out.

With access to international capital markets severely restricted,
investment is being slowed and the currency put under stress because of
corporate demand for dollars. Relief from this credit crunch in the coming
months will depend to a large extent on the ability of the leading
candidates in October's presidential election to allay uncertainty over
their economic policies.

The surge of Brazil's risk premium this week to its levels before the
massive IMF rescue plan has made clear it is not so much a lack of money
but as of confidence in the next administration that underlies Brazil's
woes. The IMF resources and Brazil's international reserves are "more than
enough to over-finance the balance of payments, not only in 2002 but also
in 2003, if the new government maintains the policies agreed with the
IMF", Goldman Sachs, the investment bank, said this week.

How foreign banks respond to Brazil's public-relations efforts to achieve
an easing of the credit crunch in coming weeks will be crucial, says the
story. Government plans to offer short-term commercial credit and export
financing using international reserves and foreign aid could go a long way
in easing the credit crunch. Unlike cash injections into the dollar spot
market, such loans provide a lower risk of capital flight.

Under the current IMF agreement, the central bank has an additional $16bn
it can use to intervene in the markets. That compares with an estimated
$14bn balance of payment gap through October. In addition, the
Inter-American Development Bank and the World Bank have promised new loans
of $7bn until the end of next year, of which $2bn could be disbursed this
year.

"Even with pessimistic assumptions, they are safe through the end of the
year," says Paulo Leme, director of emerging markets economic research at
Goldman Sachs in New York. "With strong leadership and solid management,
they can still turn things around. It is now up to the presidential
candidates to assume their responsibility."

Meanwhile, the Wall Street Journal reports that Brazil's central bank
unveiled a surprise package of measures to stem a deepening financial
crisis  and prop up the country's weakening currency. The bank's
monetary-policy director, Luiz Fernando Figueirdo, said Brazil will
increase bank reserve requirements to soak up $3.4 billion in liquidity
from the financial system and repurchase another $3.4 billion in domestic
government debt. The change reduces the amount of money banks can use to
speculate against Brazil's currency.

The central bank also freed investment funds from having to "mark to
market" the value of notes that mature in as long as one year, a measure
that sent markets plunging late May and caused losses for many
middle-class Brazilians. The measures are intended to increase liquidity
for mutual funds and reduce investor risks. Moody's Investors Service
downgraded Brazil's bonds Tuesday. Morgan Stanley, which also lowered its
rating on Brazil's debt, cautioned that prices could slide even more
before October elections, USA Today adds.


=================================
Brazil's Troubles - Commentary
================================= 

To judge by the reaction in the financial markets, the game is up in
Brazil, the Financial Times comments in an editorial. Its interest rate
spread over US Treasuries has risen to almost 23 percentage points. If
that level persists, Brazil is insolvent and will default.

The International Monetary Fund's raison d'être would be destroyed: its
backing for Brazil's economy would be shown to be worthless. Those who
argue that IMF bail-outs lead to reckless lending would be discredited:
instead, foreign creditors have been rushing for the exit. And, most
importantly, Brazil would suffer horribly. No one should care too much
about losses made in the City of London but the notion that Brazil could
restructure its debt relatively painlessly comes from cloud-cuckoo land.

Of its total debt stock of more than $250bn (£160bn), the Brazilian public
sector owes only about $75bn to foreign private sector creditors. If this
debt were reduced to current market values - roughly $40bn - the interest
savings would not change the country's debt dynamics much. If Brazil also
restructured its domestic debt, it would crush the banking system, which
holds about 30 per cent of its assets in government securities. A bank
bail-out would be necessary. And to regain credibility after default,
domestic interest rates would have to remain high, further impairing
Brazil's solvency because more than a third of its debt is linked to
domestic interest rates.

Though eventual default and disaster for Brazil are becoming more likely,
an alternative still exists, says the editorial. As John Williamson of the
Institute for International Economics argues, with lower interest rates,
Brazil's debt dynamics, though tricky, are not irredeemable. The IMF's
$30bn loan was supposed to set Brazil on the path to these lower rates.

No one should forget. Brazil is not Argentina. Politicians still have the
public's and the international community's support. The country can
collect taxes; the banking system is still healthy; and provincial
governments cannot break the national budget. But if the crisis of
confidence continues, Brazil will go the way of its southerly neighbor.

Turning confidence around is difficult but two things would help. First,
the opposition presidential candidates must recognize publicly that
default is not in Brazil's interests and commit themselves to the IMF
program. And second, the IMF should produce detailed reasoning to support
its claim that Brazil "is on a solid long-term policy trend which strongly
deserves the support of the international community". The only certainty
is that doing nothing would condemn Brazil to an unnecessary financial
collapse.