[stop-imf] Weisbrot/WPost: Brazil Pays So the Banks Don't Have To

[Robert Weissman]

Washington Post
Sunday, September 1, 2002

Brazil Pays So the Banks Don't Have To

By Mark Weisbrot

  The International Monetary Fund (IMF) is set to give final approval
for a 
$30 billion loan to Brazil, and almost everyone is applauding. Pundits
and 
financial analysts nodded approvingly when the offer was announced last 
month, some almost gloating that the Bush administration's rhetoric
about 
"no more bailouts" had bowed to reality. Brazil is being rewarded, 
according to the IMF and the Bush administration, for following "sound 
policies" and committing to maintain these polices for years into the future.

Now let's dig below the surface. Who is being "bailed out" and for what 
purpose? And how sound are the policies that the IMF and the financial 
markets have prescribed for Brazil?

An analogy that is close to home might shed some light. A few years ago, 
when the U.S. stock market bubble was inflating at an astounding rate,
the 
market would occasionally lose steam. When the Federal Reserve cut
interest 
rates or there was other favorable news, the market would rally and the 
public radio show "Marketplace" would play its happy music when it "did
the 
numbers." And the bubble continued to grow.

Now that the stock market bubble has burst, it is easy to see that these 
inflated, unsustainable prices were not good for our economy or for the 
millions of small investors who put their retirement saving into stocks
at 
the wrong time. (Actually, it was easy to see this years ago, but few
were 
willing to look).

Brazil is in a similar situation with its public debt. The debt is
growing 
at an unsustainable rate and before long it will have to be
"restructured" 
-- a polite term for defaulting. The debt bubble will burst, as it did
in 
Argentina.

Pumping another $30 billion into the bubble won't change this reality.
But 
it might help some lenders to get some of their money out before the 
default. Hence the Bush administration's conversion to "pragmatism":
U.S. 
banks are holding $25 billion of Brazil's debt, and they expect to be 
bailed out.

The bubble analogy also helps dispel another popular misconception about 
Brazil's current crisis: that it was caused by the Workers Party's surge
in 
the polls. It is true that the Brazilian bond and currency markets began 
their downward slide in May, when Workers Party presidential candidate
Luis 
Inacio "Lula" da Silva pulled ahead in the polls for October's election. 
But this is only a trigger for the crisis -- not the cause. The real
cause 
is that Brazil's debt, given interest rates (even before the crisis) and 
any plausible economic future, is too large. This is analogous to our 
recent stock market decline. The real cause was the bubble itself, which 
had to burst sooner or later -- not the accounting and corporate
scandals 
that triggered the sell-off. Stock prices were incompatible with any 
conceivable projections for future economic growth.

Now, about those "sound policies" that the IMF is supporting with this 
loan: Policies that lead to an explosive debt burden are not generally 
regarded by economists as "sound." Since the end of 1994, Brazil's
public 
debt has soared from 29 percent of GDP to 60 percent today. Moreover,
the 
country didn't even get much for selling itself into debt slavery.
Income 
per person has grown by a slow 1.3 percent annually since President 
Fernando Henrique Cardoso was elected in 1994. If we look at a longer 
period, going back to 1980, income per person has increased by less than
9 
percent total over more than two decades. In the previous 20 years (1960
to 
1980), it grew by 141 percent.

No wonder the Brazilian electorate has indicated that it is ready for 
change. The Workers Party has pledged to lower Brazil's punishing
domestic 
interest rates (among the highest in the world), revive national
industry 
(which has suffered from years of "sound policies"), and establish a 
zero-hunger program that will include food stamps for the poor. This 
platform has made Lula the leading contender in the race. Ciro Gomes of
the 
Popular Socialist Party, who has adopted much of the Workers Party
program, 
as well as stronger rhetoric against the IMF and current economic
policies, 
is running second.

The governing party candidate, José Serra, is polling a distant third. 
Recognizing this, the IMF -- together with the U.S. Treasury Department, 
which calls the shots at the fund -- has tried to lock in current
policies 
with the $30 billion loan. Most of it will be disbursed in 2003,
allowing 
the IMF to pressure the new president -- and even the current
candidates. 
President Cardoso, responding to the continued slide of Brazilian bonds
and 
currency even after the $30 billion loan was announced, has stepped up
the 
pressure. Raising the specter of past inflation, he told the media two 
weeks ago that "the candidates, whether they want to or not, will have
to 
commit to these [IMF] agreements." And they should work on making 
themselves appear believable when they do so, he added.

But improved acting skills will not solve the debt problem. Brazil's
bond 
prices are falling because the smarter bondholders have done the
arithmetic 
and concluded that the debt is unpayable. The opposition candidates are
not 
being selfish by refusing to accept IMF conditions. Why should Lula, for 
example, commit himself to an indefinite future of extremely high
interest 
rates, slow (or no) growth and nothing for the poor -- in a country with 
the worst income inequality in the world -- just so foreign creditors
can 
squeeze more debt service out of the country?

The alternative is to negotiate a debt write-down and restructuring
sooner 
rather than later, and in an orderly manner rather than through a
meltdown. 
The banks that made loans at rates of more than 20 percent got these
high 
returns because there was a risk; now they must accept that risky loans 
sometimes go sour. If the IMF insists on bailing out the banks at 
taxpayers' expense, as it is currently doing, then the Fund, too, should 
share the losses.

Some have suggested that Brazil could go the way of Argentina if it does 
not follow the IMF's prescriptions. But Argentina ended up in a serious 
depression precisely because it did what the IMF advised. Brazil is 
fortunate that despite the IMF's best efforts, its fixed exchange rate
(one 
real to one dollar) collapsed nearly three years earlier than
Argentina's. 
So it will not have to face both devaluation and default at the same time.

More importantly, as a big country with the world's ninth-largest
economy, 
Brazil will have more bargaining power. The IMF, as head of a creditors' 
cartel that has an interest in punishing Argentina for its default, has 
been brutal to that country. Neither the Fund nor the U.S. Treasury 
Department, which controls it, will be able to do the same to Brazil.

There is no need for Brazil to surrender to the IMF and other creditors
its 
right to choose its own economic policies. IMF officials believe they
know 
what is best for Brazil, and even 20 years of failure is not enough to 
persuade them -- or the Bush administration -- to consider that
Brazilians 
might be better off charting their own course. But they will be.

Mark Weisbrot is co-director of the Center for Economic and Policy 
Research, an independent nonpartisan think tank in Washington, and
author 
of a weekly newspaper column on economic and policy issues.

© 2002 The Washington Post Company