On Sunday, October 4, 1998, as international bankers, investors, finance ministers and officials from the leading multilateral development banks met in Washington for the annual World Bank and International Monetary Fund meetings, many eyes were looking south, to Brazil.
Late in the afternoon, when Brazil’s finance minister broke the news that Fernando Henrique Cardoso had narrowly won Brazil’s election in the first round, “the room broke into loud applause,” according to Bob Fernandez reporting for Knight Ridder. “Cardoso is an International Monetary Fund favorite,” Fernandez explained.
Officials had been scrambling for weeks to put together an international bailout package for Brazil in response to the Asian Financial Crisis, which threatened to spread to other emerging markets, including those in South America. But the negotiations were held behind closed doors. With key elections on the horizon in Brazil, Cardoso, the incumbent and leading candidate, went to great lengths to distance himself from the IMF package. The New York Times reported on October 1: “Among ordinary Brazilians, the I.M.F. is associated, if not faulted, for a punishing recession through the 1980's.”
On October 2, Reuters reported that Cardoso “has repeatedly denied that he will announce austerity measures immediately after the polls close.” Even after his first-round victory, Cardoso was reluctant to announce any measures before governors and state officials faced critical run-off elections later in the month, worried that an embrace of the IMF plan could hurt their chances.
Cardoso’s main opponent in the presidential race was Luiz Inacio Lula da Silva of the Workers’ Party, who would later go on to win the presidency in 2002, and again in 2006. Lula voiced strong criticism of any potential deal with the IMF, saying that it would “tighten one more knot on the neck around Brazilians.” Lula would go on to end Brazil’s borrowing relationship with the Fund in 2005 when he was president. But the U.S. and other leading players in the global financial system were seen as heavily supportive of Cardoso in ‘98. The New York Times reported in late September (emphasis added):
The proposed package would be openly negotiated only after the presidential election in Brazil next Sunday, and only if -- as expected -- Mr. Cardoso is re-elected. Nevertheless, a senior Clinton Administration official acknowledged on Friday that active discussions are already in progress with the Brazilians, the I.M.F., other governments and private lenders.
If Lula were elected, the IMF support would never materialize. Peter Fritsch of the Wall Street Journalwrote in early October that it wasn’t so much the money that Brazil needed, but a “stamp of approval.” This is backed up in internal documents obtained through Freedom of Information Act (FOIA) requests. A briefing on an October 3, 1998 meeting with the G-7 finance ministers, just one day before the presidential election, notes that any Brazil package “needs G-7 backing to go in alongside the IMF. Not just a matter of money – also a matter of showing G-7 support and leadership in fighting contagion.” The document also notes that “Brazil has been working with the IMF” for some time on an agreement, despite the fact that Cardoso had yet to formally or publicly request such support.
Indeed, the U.S. wasn’t just interested in saving Brazil for Brazil’s sake. “The financial stability and prosperity of Brazil is of vital importance to the U.S.,” then Treasury Secretary Robert Rubin said. Fernandez explained in his report for Knight Ridder:
U.S. companies and the American economy have a big stake in Cardoso's success. About 2,000 U.S. companies have operations in Brazil, including 405 of the 500 largest U.S. firms. U.S. banks have about $27 billion at risk in Brazil, some of which could be lost if the country is forced to default or reschedule its debts.
Rubin wasn’t the only official involved in the Brazilian negotiations who would have a role, just over a decade later, in engineering the bailout of U.S. banks. Timothy Geithner was Assistant Secretary for International Affairs in the Treasury Department in 1998 while Lawrence Summers was the Deputy Secretary under Rubin.
In order to get more information about the behind-the-scenes negotiations taking place in the fall of 1998, the Center for Economic and Policy Research filed a FOIA request with the U.S. Department of the Treasury back in 2013. Unfortunately, the documents that were released just this month are subject to much censorship. Of 111 pages, 44 were withheld in full, while 26 were heavily redacted. The few documents released in full contain little of substance. But the exemption used in the redactions is just as interesting as the mysterious text behind the black markings. The vast majority of redactions were made under (b)(1), which “protects information that could reasonably be expected to cause identifiable or describable damage to the national security as it pertains to foreign relations or foreign activities of the United States.”
Whatever was happening behind the scenes in the fall of ’98, the U.S. government still doesn’t want the public – including the Brazilian public – to know about it even 17 years later.