The U.S. administration's backing of a $30 billion loan package arranged for Brazil by the International Monetary Fund (IMF) marks an abrupt change in President George W. Bush's policy of not bailing out developing countries, and its impact may be seen in the results of October elections in the hemisphere's biggest country.
The aid, the second-largest IMF loan in its history, could not come at a more crucial time for South America's largest economy. Brazilian presidential candidate Jos Serra, allied with outgoing President Fernando Henrique Cardoso and the favorite of the international banking community, has been trailing in the polls behind two left-of-center candidates. The New York Times, which has been pushing for the multilateral lender to come to Brazil's aid, said the government's candidate will get a boost from the IMF funds.
Brazil's Troubled Financial Waters
Between now and the end of the next year, Brazil needs around $45 billion to finance private and public foreign debts and repatriate profits of foreign companies with operations in the country.
Against that bleak background, Brazil's economy began hitting rougher waters last May when polls showed that Luiz Inacio Lula da Silva from the left-of-center Workers' Party (Partido dos Trabalhadores, or PT), was pushing ahead of other candidates disputing the presidential elections. Fearing the implications of Lula win, as well as fallout from U.S. economic recession, investors began losing confidence in the country's ability to finance its debt, now at 55% of GDP.
Speculation against the economy resulted in Brazil's currency jumping from 2.40 reals to the dollar in May to a record high of 3.61 reals to the dollar on July 31, and the country's risk premium rising to above 2,000 basis points on top of the U.S. treasury bills (the interest rate the country has to pay to take out new loans).
Companies responded by cutting back investments, reducing growth projections, while monetary authorities began to fear that inflation might creep up.
The country's deteriorating economic situation forced Cardoso to stop scapegoating Lula for Brazil's problems and emphasize the country's strong fundamentals. "I will not hand over the country bankrupt because in fact it is not. This for me is more important than any other candidate," Cardoso said.
New IMF Money Conditions Brazil's Response
While Cardoso will not hand over the country insolvent, he will pass government reins to the next administration in a scenario that leaves little room to maneuver. According to the IMF package, a fiscal surplus of 3.75% of the budget must be kept. This is four times the amount the government invested in public works and health centers last year. To insure that the next administration does not veer from course, the IMF will only disburse the greater part of the resources, $24 billion, through the course of 2003 and after checking the country's accounts every three months.
Recognizing that Brazil's economy would go into an economic tailspin without a bailout, the two left-of-center candidates, Lula from the PT and Ciro Gomes from the Popular Socialist Party (Partido Popular Socialista, or PPS), grudgingly accepted the deal's restraints. Only populist Anthony Garotinho from the Brazilian Socialist Party (Partido Socialista Brasileiro, or PSB), who is trailing in the election polls, said he opposed the IMF package. Now, despite saying they plan to break from the current economic model, opposition candidates will have little leeway in implementing changes without confronting the veto power of international capital.
Along with fiscal austerity measures, the IMF will allow the Central Bank to spend $16 billion to defend the country's currency. While some analysts note that it is necessary to irrigate the market with dollars so that companies and the government can roll over debts, others remain critical of monetary authorities' ability to stop speculative runs on the real. "It is stupid to burn dollars in the market," said Reinaldo Goncalves, an economics professor at the Universidade Federal de Rio de Janeiro. "The situation will only stop becoming worse when there is a change in the government. Until then, people will protect themselves with dollars from the historical economic imbalances of the Cardoso government."
Brazil's citizens feel deceived that after following the neoliberal recipe of fiscal austerity, liberalization of the capital account, privatization, and opening up to more trade, the country is left more economically dependent than before, and significant social progress remains elusive. With the loan package, the only hope of the incoming administration, no matter what its political stripe, is to improve the government's finances before the current economic medicine reduces growth even further and puts the country in a more desperate situation.
International Policymakers Use Carrot-and-Stick Approach
Perhaps partly to create these conditions, the Bush administration decided to put its cards behind the IMF deal. In addition, noted New York Times columnist Paul Krugman, "If Brazil hadn't gotten a loan, the South American financial crisis, already comparable to the one that struck Asia in 1997, might quickly have turned into something much bigger."
The $30 billion lifeline marks an important change in the administration's handling of developing country's balance-of-payment problems. The policy has been to let investors assume the risk of where they lent their money instead of using public money to bail them out, except in cases of strategic importance like Turkey and Pakistan.
Asked ahead of his recent Southern Cone trip if he would support financial assistance to the countries he would visit--Argentina, Uruguay, and Brazil--U.S. Treasury Secretary Paul O'Neill said that all depended on their ability "to put into practice policies that ensure that as assistance money comes it does some good and it doesn't just go out of the country to Swiss bank accounts." Not surprisingly, his innuendo caused immediate devaluation of the real, angering Brazilians; and White House spin doctors rushed into action to save already tenuous relations with the Brazilian government.
In the end, the Bush administration realized that it could not let Brazil go the way of Argentina without putting the world's economic recovery in jeopardy. The Wall Street Journal wrote that the banking community finally had gotten the attention of White House officials, who tend to have stronger links to energy, industry, and defense sectors than to Wall Street banks. U.S. banks, whose shares are already suffering due to corporate scandals, are in no position to write off the $25 billion they have lent to Brazil. And if Bush wants to stem the fall of his popularity in the polls, he will have to prop up the stock market and keep middle- and upper-class voters happy. After the announcement of the IMF loan, the stock markets rebounded in the United States, Europe, and Brazil.
However the Bush administration and the IMF do not apply the same logic to Argentina and, according to Joseph Stiglitz, who won the Nobel Prize in Economics in 2001, that's because the IMF is trying to use Argentina as a lesson for other countries. "Reflecting the interests of its creditors, the fund wants to be tougher on Argentina to be certain that other countries in the same situation do not declare a default in the future," he said. Roberto Lavagna, Argentina's economics minister, explains the IMF's discrimination in a similar way. "The rescue of Brazil and Uruguay [which received a $1.5 billion bridge loan from the U.S. Treasury] is to avoid default of these country's debts. We have already passed this phase; we are already in default," he said.
In the latest IMF loan, Brazil got off relatively easily. Not only is the amount much larger than what observers expected, but the terms of the loan are also more lenient than what was imagined. The fund wanted the government to raise the fiscal surplus to 4% of GDP, but Brazilian negotiators were able to keep this at 3.75%. "Brazil is on a solid, long-term policy trend which strongly deserves the support of the international community," IMF Managing Director Horst Koehler said.
Nonetheless dependent on foreign capital to finance its development, Brazil is left spinning around a cul-de-sac with no way out. Cardoso might be remembered for stabilizing the country's economy and ending hyperinflation, but the latest economic turbulence reveals that deeper problems remain unresolved. Can the next president do any better?
Matthew Flynn is a correspondent for Business News Americas. He is based in Minas Gerais, Brazil.
- 194 World Financial Institutions