FWD: Brazil hostage to IMF's designs (fwd)

[Robert Weissman <rob@essential.org>]

>                                          LE MONDE DIPLOMATIQUE - March 1999
>
>      GLOBAL CRISIS HITS LATIN AMERICA
>
>                        Brazil hostage to IMF's designs
>       ______________________________________________________________
>
>     The assault on the real in January 1999 was the result of a careful
>     sharing out of roles between the IMF and the "investors", whom it
>     allowed to put the finishing touches to the looting of Brazil's
>     currency reserves. With public assets to sell off cut-price,
>     foreign capital can now come and shop around. But there is fierce
>     resistance by all sectors of society - which could upset these
>     well-laid plans.
>
>                                                 by MICHEL CHOSSUDOVSKY *
>       ______________________________________________________________
>
>   Succumbing to the speculative onslaught, the Sao Paulo stock exchange
>   crumbled on 13 January 1999, Brazil's Black Wednesday. The vaults of
>   Brazil's central bank were burst wide open; the real's peg to the
>   dollar was broken. The Central Bank governor, Gustavo Franco, was
>   replaced by an economics professor, Francisco Lopes, who was
>   immediately whisked off to Washington together with Finance Minister
>   Pedro Malan for high level "consultations" with the International
>   Monetary Fund (IMF) and the United States' Treasury.
>
>   These week-end negotiations with Washington officials were a preamble
>   a few days later to an early morning meeting at the New York Federal
>   Reserve Bank with Brazil's creditors. On the breakfast list were
>   Quantum Hedge Fund speculator George Soros, Citigroup Vice-President
>   William Rhodes, Jon Corzine from Goldman Sachs and David Komansky of
>   Merrill Lynch (1). This private meeting held behind closed doors was
>   crucial: Rhodes had headed the New York Banking Committee on behalf of
>   some 750 creditor institutions; he had first dealt with President
>   Fernando Henrique Cardoso when he was finance minister in 1993-94,
>   negotiating the "restructuring" of Brazil's external debt and the
>   launching of the real plan (2). The result was a swelling of Brazil's
>   internal debt from $60 billion in 1994 to more than $350 billion in
>   1998.
>
>   Meanwhile public opinion had been carefully misled as to the causes of
>   the crisis: Asian flu was said to be spreading. And the global media
>   had casually laid the full blame on the "rogue governor" of the state
>   of Minas Gerais, Itamar Franco (a former president of Brazil), for
>   declaring a moratorium on debt payments to the federal government (3).
>   The threat of impending debt default by some federal states'
>   governments was said to have affected Brasilia's "economic
>   credibility".
>
>   Brazil's National Congress was also blamed for not having granted a
>   swift and "unconditional rubber stamp" to the IMF's economic medicine
>   in December 1998. The latter required budget cuts of the order of $28
>   billion (including massive lay-offs of civil servants, the dismantling
>   of social programmes, the sale of state assets, the freeze of transfer
>   payments to state governments and the channelling of state revenues
>   towards debt servicing (4).
>
>    Squeezing Credit
>
>   In insisting on a tight monetary policy, the Washington-based
>   institutions, in consultation with Wall Street, were also intent on
>   destabilising Brazil's industrial base, taking over the internal
>   market and speeding up the privatisation programme. The government
>   overnight benchmark interest rate was increased in early February on
>   the instructions of the IMF to a staggering 39 percent (a year)
>   implying commercial bank lending rates of between 50 percent and 90
>   percent a year. Local manufacturing, crippled by impossible debts, had
>   been driven into bankruptcy. Purchasing power had crumbled; interests
>   rates on consumer loans were as high as 150-250 percent.
>
>   While "confidence" had been temporarily restored on financial markets,
>   the real had lost more than 40 percent of its value, leading to an
>   almost immediate surge in the prices of fuel, food and consumer
>   essentials. The demise of the nation's currency had contributed to
>   brutally compressing the standard of living in a country of 160
>   million people where more than half the population is below the
>   poverty line. In turn, the devaluation had had a backlash on Sao
>   Paulo's southern industrial belt where the (official) rate of
>   unemployment had reached 17 percent in 1998. In the days following
>   Black Wednesday, multinational companies including Ford, General
>   Motors and Volkswagen reported work stoppages and massive lay-offs of
>   workers.
>
>   At first sight, the plight of Brazil looks like a standard re-run of
>   the 1997 Asian currency crisis. The IMF's lethal economic medicine is
>   broadly similar to that imposed in 1997-98 on Korea, Thailand and
>   Indonesia. Yet there was a striking difference in their timing: in
>   Asia, the IMF bailouts had been negotiated on an ad hoc basis after,
>   rather than before the crisis. In other words, the IMF would only come
>   to the rescue in once national currencies had tumbled and countries
>   were left with unsurmountable debts.
>
>   In contrast, in the case of Brazil, the IMF operation was launched in
>   November 1998 - two months prior to the financial meltdown -
>   announcing a $41.5 billion aid package as part of a new IMF-G7
>   arrangement. The economic medicine was meant to be preventive rather
>   than curative. In practice, the IMF-G7 scheme had exactly the opposite
>   results. Rather than staving off the speculative onslaught, it
>   contributed to accelerating the outflow of money wealth. Twenty
>   billion dollars were taken out Brazil in the two months following the
>   approval of the IMF precautionary package in November: an amount of
>   money of the same order of magnitude as budget cuts required by the
>   IMF. Brazil's central bank reserves were being emptied at the rate of
>   $400 million a day, falling from $75 billion in July 1998 to $27
>   billion in January 1999. The first tranche of the IMF loan of more
>   than $9 billion (granted in November 1998) had already been used to
>   prop up Brazil's ailing currency: it was barely sufficient to finance
>   one month's flight of capital.
>
>   The IMF-sponsored operation was largely instrumental in enticing
>   speculators who knew the money was there to be drawn on. If the
>   central bank were to default on its foreign exchange contracts, the
>   availability of IMF-G7 money upfront would enable banks, hedge funds
>   and institutional investors to swiftly collect their loot. The timing
>   of the devaluation was part of the ploy: by ensuring a stable exchange
>   rate in the two month period following the announcement of the $41.5
>   billion loan, the IMF had allowed speculators to swiftly cash in on an
>   additional $20 billion. Wall Street, the Washington institutions and
>   Pedro Malan's economic team knew that a devaluation was imminent and
>   that the IMF-G7 preventive package was only a stop gap measure. In
>   other words, the IMF programme enabled currency speculators to buy
>   time. The Central Bank was instructed to hold on as long as possible.
>   By 15 January, when the IMF agreed to let the currency float, it was
>   too late: the central bank's reserves had already evaporated.
>
>   From the Davos Economic Summit, Stanley Fischer, the IMF senior deputy
>   managing director and main architect of the November loan package,
>   headed to Brasilia to negotiate the terms of a new agreement. Short
>   term debts had spiralled, "new policy initiatives" were being
>   demanded, and the austerity measures agreed with the IMF a few months
>   earlier were deemed insufficient to "restore a lasting recovery of
>   confidence". New fiscal targets were established: Brasilia was "to
>   intensify and broaden the privatisation and divestment effort",
>   opening the way to the liquidation of federal and state banks and
>   speeding up the appropriation of Brazil's energy and strategic
>   sectors, public utilities and infrastructure by foreign capital (5).
>
>   A second tranche of $9 billion (of the $41.5 billion loan) helped
>   replenish the coffers of the central bank, enticing speculators to
>   continue their deadly raids. To ensure the success of the speculative
>   onslaught, Francisco Lopes (nominated barely two weeks earlier) was
>   fired as head of the central bank. His chosen successor, Arminio Fraga
>   Neto was a former adviser to the Soros Fund in New York.
>
>   The IMF agreement signed in early February explicitly requires the
>   de-indexation of wages as "a means of combating inflation". According
>   to the IMF, increased wages are viewed as the main cause of inflation.
>   Similarly, the authorities have justified the increased levels of
>   unemployment --"a necessary evil" - on the grounds that higher
>   unemployment is an effective means of dampening inflationary
>   pressures. In other words, after having unleashed a fatal inflationary
>   spiral through currency devaluation, the IMF is demanding the adoption
>   of a so-called "anti-inflationary programme". This "programmed
>   bankruptcy" of domestic producers has been instrumented through the
>   credit squeeze, not to mention the threat by Malan to allow for
>   increased trade liberalisation and (import) commodity dumping with a
>   view to obliging domestic enterprises to be "more competitive".
>
>   In other words, the financial crisis has created conditions which
>   favour the rapid recolonisation of the Brazilian economy. The
>   depreciation of the real will speed up the privatisation programme as
>   well as depress the book value (in real) of state assets. The IMF's
>   economic medicine - combined with mounting debt and continued capital
>   flight - spells economic disaster, fragmentation of the federal fiscal
>   structure and social dislocation.
>
>   Various organisations in Brazil are opposing Cardoso and Malan's
>   policies - to start with, the powerful Catholic Church which has
>   criticised the country's "total submission" to the IMF's orders.
>   Francisco Whitaker, secretary of the Justice and Peace Committee of
>   the Confederation of Brazilian Bishops, has called the agreement a
>   "threat to national security". The national lawyers' association says
>   "the country cannot be transformed into a laboratory for experiments"
>   for the IMF and considers it "inadmissible that the Brazilian state is
>   subordinating itself to external interests which compromise
>   development, suppress jobs and heighten social exclusion" (6). The
>   seeds of a powerful social movement are growing which may make it
>   impossible for Cardoso to go on satisfying Washington and the IMF. The
>   crisis extends beyond Brazil. Throughout the Latin American region,
>   the stranglehold of Wall Street creditors over monetary policy is in
>   question. In Argentina, discussions are under way in Buenos Aires to
>   replace the Argentinean peso by the US dollar, implying not only the
>   complete control over money creation by external creditors but even
>   the printing of banknotes by the US Federal Reserve. Other Latin
>   American countries may follow suit, narrowly viewing the
>   "dollarisation" of their currencies as a way of averting financial
>   disaster.
>
>   The G7 nations and 14 other countries contributed - through the Bank
>   of International Settlements - to the financing of the IMF-sponsored
>   operation. The governments of these countries were fully aware of the
>   implications of the $41.5 billion loan agreed last November. They bear
>   a heavy burden of responsibility for the impoverishment of the
>   Brazilian people and its consequences for the rest of Latin America.
>
>
>   * Professor of Economics, University of Ottawa, author of La
>   mondialisation de la pauvretT, Editions EcosociTtT, Montreal, 1998.
>
>    1. O Estado de Sao Paulo, 21 January 1999.
>    2. See Emir Sader, "Le pacte des Tlites brTsiliennes", Le Monde
>       diplomatique, October 1998.
>    3. See the Financial Times, London, 18 January, 1999.
>    4. Press conference by Michel Camdessus and Stanley Fischer,
>       respectively director and deputy director of the IMF, 13 November
>       1998. See also Letter of Intent and Brazil: Memorandum of Economic
>       Policy, IMF, Washington, 13 November 1998.
>    5. See the joint declaration of the Brazilian finance minister and
>       the IMF team, News Brief no 99/5, IMF, Washington, 4 February
>       1999.
>    6. AFP report, 9 February 1999.
>
>     _________________________________________________________________
>
>              ALL RIGHTS RESERVED ª 1999 Le Monde diplomatique
>
><http://www.monde-diplomatique.fr/inside/1999/03/17brazil.html>