[stop-imf] Goldstein: Brazil's unwatched borrowing

[Robert Weissman]

Financial Times

Brazil's unwatched borrowing
By Morris Goldstein
Published: August 26 2002 21:00 | Last Updated:
August 26 2002 21:00


The $30bn International Monetary Fund rescue
package for Brazil raises a key question: how
could a country recently characterised as a star
performer again be on the edge of financial crisis
after complying faithfully with its last IMF
programme?
Does Brazil's crisis means there is something
terribly wrong with the international financial
system? Fernando Henrique Cardoso, Brazil's
president, recently gave his own answer: "Rarely
have markets behaved so openly against their own
interests, ignoring fundamentals, creating false
expectations."
There is something wrong. But it is not what Mr
Cardoso has in mind.
Brazil has erupted into crisis because its policy-
makers, private financial markets and the IMF have
not paid enough attention to the country's
steadily mounting debt problem. Contrary to what
you often hear, some important fundamentals in
Brazil have deteriorated over the past few years
and the external environment facing it has also
worsened.
The latest rescue package also shows that for all
their rhetoric about withholding large-scale
official financing when it is being used to prop
up an unsustainable debt position, the IMF and the
leading industrialised countries are not willing
to do so when push comes to shove for larger
emerging economies.
Sure, Brazil's competitive, floating exchange
rate, its inflation-targeting framework for
monetary policy, its primary budget surplus and
its hedged banks put it in a better position than
Argentina was before the latter's crisis. But
Brazil's track record in some other important
economic dimensions has been dismal.
In 1994, Brazil's net public debt as a share of
gross domestic product was 30 per cent. Today it
is almost double that - and this despite
significant privatisation revenues and a tax ratio
to GDP much above that of many emerging economies.
In not even one of the past eight years has
Brazil's net public debt ratio declined.
Because a large share - more than 40 per cent - of
Brazil's public debt is denominated in, or linked
to, the dollar, it made itself hostage to the
large depreciation of the real that has occurred
in recent years. Is this the kind of fiscal policy
and debt management behaviour that Paul O'Neill,
US Treasury secretary, and the IMF want to hold up
as the model for emerging economies?
Debt build-ups become more troubling when economic
growth slows. This year, the Brazilian economy is
expected to grow by about 1.5 per cent compared
with almost 4.5 per cent in 2000.
The picture of external debt and financing
requirements is no better.
Brazil's ratio of external debt - public and
private - to exports stands at more than 400 per
cent. Since 1980 only one emerging economy, Chile,
has been able to bring down a debt ratio from high
to more moderate levels without significant debt
restructuring. Brazil's annual external debt
service ratio is a sky-high 90 per cent. These
ratios are so poor because its export sector, like
Argentina's, is a mere 10 per cent of GDP - about
one-fifth of those of average Asian emerging
economies, and below half those of Mexico and
Chile.
In 2000, Brazil recorded a current account deficit
of 4 per cent of GDP, slightly higher than the
deficit expected this year. But at that time
Brazil was receiving $33bn in foreign direct
investment; this year, it will be fortunate to get
half that amount. With external financing
requirements next year of $45bn-$50bn, there is an
urgent question about where the money will come
from. Brazilian companies are already facing an
external credit crunch and their efforts to cover
foreign currency debt payments have contributed to
the steep decline in the real this year.
In addition, there is the uncertainty about who
will be governing Brazil after the election. This
makes it harder to lay out a credible, multi-year
plan for key economic policies. Little should be
expected from broad pledges to honour contracts
and maintain a given primary budget surplus.
Given all the above, little wonder that since the
start of the year markets have more than doubled
the interest rate spread on Brazil's benchmark
bonds.
No one wants an IMF that is so risk-averse that it
forsakes lending to all but the Switzerlands of
the world; or one that is so preoccupied with
minor technical issues that it is willing to stand
aside in the face of a widening and deepening
financial crisis in Latin America. But the IMF has
no future if it does not speak out forcefully
about debt vulnerabilities when they are on the
rise, and even more so if it cannot make debt
sustainability a core condition for IMF financial
assistance.
The IMF and industrialised nations failed to
exercise that responsibility when they bailed out
Argentina last August and Turkey before that.
Unless they make future IMF disbursements to
Brazil conditional on debt restructuring with
appropriate macroeconomic and structural measures,
I fear they will do so again.

The writer is a senior fellow at the Institute for
International Economics