Asia Times: Brazil: Who's crazy? (Jan. 14, 1999)



	January 16, 1999	atimes.com

Editorials

Brazil: Who's crazy? (Jan. 14, 1999)

Last week, Itamar Franco, the governor of Minas Gerais, the second largest of Brazil's 26 states, announced a moratorium on the repayment of some $15 billion Minas owes to the federal government. The announcement triggered massive capital flight from Brazil - reaching $1.2 billion on Tuesday - and forced Wednesday's 8 percent devaluation of the country's currency, the real.

''Itamar Franco is crazy. He decided to break the system,'' was the comment of Walder de Goes, president of the Brazilian Institute of Political Studies. What's crazy, however, we rather suspect instead, is the IMF program Brazil signed on to last November. For the record, Franco, a fomer president of Brazil (1993/94), imposed the moratorium because, he said, the state was nearly out of funds and his choice was between paying the debt or paying state employees.

In return for standby credits in the amount of $41 billion, the government of President Fernando Henrique Cardoso undertook in a November13 letter of intent with the IMF to make budget cuts and raise taxes for a combined total of $23 billion. The measures were intended to bring the federal government out of deficit and register 2.6 percent, 2.8 percent and 3.0 percent surplusses in 1999, 2000 and 2001, respectively. Some of the measures were passed by the legislature late Wednesday and helped spark a New York stockmarket comeback.

But, to reiterate, it's those measures that are crazy, not Mr. Franco. Brazil's economy is already in the doldrums and without doubt would go into a tailspin if the planned measures were implemented. Franco's action merely put the spotlight on and triggered the blow-up of an economically and politically untenable program. The forced devaluation merely confirmed its untenability.

The imminent danger now exists, of course, that Brazil's woes will ignite another round of financial turmoil - first in Latin America, then likely beyond. Brazil is the world's eighth largest economy and accounts for 40 percent of South and Central America's economic output. Neighboring economies, especially Argentina, are highly dependent on Brazil. But, with the possible exception of Chile, all other Latin American economies - notably Mexico - are on shaky ground and subject to contagion.

Beyond South America, contagion has the very real potential of spreading to both the United States and the E.U. American banks have a whopping $26 billion loan exposure to Brazil; Spanish and Portuguese banks are vulnerable, and even German banks, which committed sizeable new funds to Brazil in 1998, are not immune. Note that a lot was made of the U.S. banks' $6 billion exposure to Russia in the summer of 1998.

While the dangers inherent in the Brazil situation are readily outlined, solutions - much as in Asia for the past year and a half - are more difficult to come by. The only thing certain for the time being is that the IMF's tried and - as has been proved tiresomely often - not true recipes have once again been found wanting. Surely, when you've got trouble walking, cutting off your foot is not the way to go.