Global Policy Forum

By Abid Aslam

The claim that the Brazilian crisis, like the earlier financial crises in other parts of the world, is another instance of the markets punishing a profligate regime, is wearing thin. The view gaining increasing acceptance is that the problem lies with the financial markets and the international financial institutions.

Market and political turmoil sparked by the mid-January devaluations of the Real, Brazil's currency, serves once again to highlight nagging questions about the international financial system. 'Every time the financial markets punish a country, the common reaction is to say it was because of something that country did,' said economist Mark Weisbrot of the Preamble Centre, a Washington-based research and advocacy group. 'It's a problem in the financial markets themselves and with international financial institutions.'

That view appears to have garnered little sympathy at the US Treasury and the International Monetary Fund (IMF), where officials scrambled to make it clear that Brazil's decision to devalue was taken alone and without prior consultation or waming. IMF Managing Director Michel Camdessus,in a statement on l3 January, placed responsibility squarely on Brasilia's shoulders. 'No effort should be spared to ensure the rapid implementation of the government's fiscal adjustment, structural reform, and privatisation programme together with the pursuit of an appropriately strong monetary policy stance,' he said.

Last November, the IMF mobilised $41.5 billion in international loans to help defend the Real and prevent the kind of market mayhem that hit Mexico in 1994, Thailand, Indonesia and South Korea in 1997, and Russia last year. The IMF said Brazil would maintain its exchange-rate regime, devaluing the Real by 7.5% per year and gradually broadening the 'band' within which its value was permitted to fluctuate.

Central problem

Brasilia attempted a controlled, 9% devaluation on 13 January, but scrapped its support of the Real on 15 January amid capital flight that continued at a rate of about $1 billion per day. Instead, authorities allowed the Real to float freely. The currency fell by another 9% in early trading on 15 January. How long it would be left to sink or swim was to be the subject of emergency meetings in Washington between Brazilian Finance Minister Pedro Malan, US and IMF officials, and private investors. The alternative to the 15 January's move, officials in Washington feared, would have been to spend down the govemment's foreign currency reserves. These fell by some $3 billion in the first two weeks of January alone, to about $45 billion.

Nevertheless, 'the failure of the bailout to stabilise the Brazilian situation underscores the central problem, which is the bailout approach itself,' said US Congressman Jim Saxton. The package included $18 billion from the IMF, $5 billion from the US Exchange Stabilisation Fund, and $4.5 billion each from the InterAmerican Development Bank (IDB) and the World Bank. In exchange for the money, Brasilia agreed to reduce its $65 billion deficit by raising taxes and cutting government spending; trimming pensions, increasing social security contributions and keeping down unit labour costs, and speeding up the privatisation of public-sector enterprises. Those steps conform with the IMF's standard approach to macroeconomic stabilisation. Trouble is, they amount to 'trying to shrink the deficit by shrinking the economy,' said Weisbrot. That contraction was having devastating consequences in a country whose income distribution is one of the world's most unequal and about half of whose 160 million people live in poverty, according to University of Ottawa economist Michel Chossudovsky.

Saxton, the Republican former chairman of the US legislature's Joint Economic Commission, highlighted the 'moral hazard problems' of bailouts - meaning that they enable private investors and financial speculators to avoid the worst consequences of their actions by shifting the costs of ruin to the public sector. That is because intemational loans are made to the government, which incurs the debts in order to meet investors' currency demands while imposing austerity on the public to raise money with which to pay back the loans.

Between November and the 13 January's action, the government in Brasilia has drawn some $9 billion from the international preventative bailout - roughly the same amount the central bank had doled out to people seeking to swap their Reals for dollars.

Reimbursing speculators

'The bailout money ... (was) intended to enable Brazil to meet current debt servicing obligations - that is, to reimburse the speculators,' said Chossudovsky. That, added Weisbrot, involved 'forcing the central bank and government to absorb the foreign exchange risks' on behalf of private investors. What's more, Brasilia has repeatedly raised interest rates in a bid to attract foreign investors - and in recent months, in a desperate effort to ' persuade them not to flee. Again, the price has been immense: according to financial analysts at J P Morgan Co - a financial firm in Sao Paulo - interest rate hikes last year cost Brazil $5 billion per month in additional debt servicing obligations.

The strategy failed, according to Chossudovsky: 'Rather than curbing the flight of capital, the structure of high interest rates had contributed to heightening the debt burden, not to mention the devastating impact of the credit squeeze on domestic producers,' who could not afford to borrow at such high rates. Yet, he noted, sales tax increases and other measures to service official debt would be funded by ordinary citizens and 'contribute to compressing real purchasing power'. In turn, that would only serve to deepen recession in the homes and shops that make up Brazil's domestic economy, and amplify social division and political discontent within the country, Weisbrot added, noting, 'It was an unworkable arrangement to begin with.'

On 14 January, IDB President Enrique Iglesias chided financial markets for their irrationality, but argued that confidence in Latin America's economic giant had been sapped by political squabbles between the central and state governments over debts owed by the latter to federal coffers, a reference to a 90-day debt moratorium declared in early January by the state of Minas Gerais. That dispute was sharpened by the IMF package, which called for 'a curb on transfer payments to state governments', Chossudovsky noted.

The World Bank on 15 January issued a statement that it stands ready to provide its continuing support as the govemment's fiscal and structural, reforms are implemented ... in line with the IMF-led package of international support.' - IPS

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