Washington Post, September 1, 2002
San Jose Mercury News - September 5, 2002
The International Monetary Fund (IMF) is set to give final approval for a $30 billion loan to Brazil, and almost everyone is applauding. Pundits and financial analysts nodded approvingly when the offer was announced last month, some almost gloating that the Bush administration's rhetoric about "no more bailouts" had bowed to reality. Brazil is being rewarded, according to the IMF and the Bush administration, for following "sound policies" and committing to maintain these polices for years into the future.
Now let's dig below the surface. Who is being "bailed out" and for what purpose? And how sound are the policies that the IMF and the financial markets have prescribed for Brazil?
An analogy that is close to home might shed some light. A few years ago, when the U.S. stock market bubble was inflating at an astounding rate, the market would occasionally lose steam. When the Federal Reserve cut interest rates or there was other favorable news, the market would rally and the public radio show "Marketplace" would play its happy music when it "did the numbers." And the bubble continued to grow.
Now that the stock market bubble has burst, it is easy to see that these inflated, unsustainable prices were not good for our economy or for the millions of small investors who put their retirement saving into stocks at the wrong time. (Actually, it was easy to see this years ago, but few were willing to look).
Brazil is in a similar situation with its public debt. The debt is growing at an unsustainable rate and before long it will have to be "restructured" -- a polite term for defaulting. The debt bubble will burst, as it did in Argentina.
Pumping another $30 billion into the bubble won't change this reality. But it might help some lenders to get some of their money out before the default. Hence the Bush administration's conversion to "pragmatism": U.S. banks are holding $25 billion of Brazil's debt, and they expect to be bailed out.
The bubble analogy also helps dispel another popular misconception about Brazil's current crisis: that it was caused by the Workers Party's surge in the polls. It is true that the Brazilian bond and currency markets began their downward slide in May, when Workers Party presidential candidate Luis Inacio "Lula" da Silva pulled ahead in the polls for October's election. But this is only a trigger for the crisis -- not the cause. The real cause is that Brazil's debt, given interest rates (even before the crisis) and any plausible economic future, is too large. This is analogous to our recent stock market decline. The real cause was the bubble itself, which had to burst sooner or later -- not the accounting and corporate scandals that triggered the sell-off. Stock prices were incompatible with any conceivable projections for future economic growth.
Now, about those "sound policies" that the IMF is supporting with this loan: Policies that lead to an explosive debt burden are not generally regarded by economists as "sound." Since the end of 1994, Brazil's public debt has soared from 29 percent of GDP to 60 percent today. Moreover, the country didn't even get much for selling itself into debt slavery. Income per person has grown by a slow 1.3 percent annually since President Fernando Henrique Cardoso was elected in 1994. If we look at a longer period, going back to 1980, income per person has increased by less than 9 percent total over more than two decades. In the previous 20 years (1960 to 1980), it grew by 141 percent.
No wonder the Brazilian electorate has indicated that it is ready for change. The Workers Party has pledged to lower Brazil's punishing domestic interest rates (among the highest in the world), revive national industry (which has suffered from years of "sound policies"), and establish a zero-hunger program that will include food stamps for the poor. This platform has made Lula the leading contender in the race. Ciro Gomes of the Popular Socialist Party, who has adopted much of the Workers Party program, as well as stronger rhetoric against the IMF and current economic policies, is running second.
The governing party candidate, José Serra, is polling a distant third. Recognizing this, the IMF -- together with the U.S. Treasury Department, which calls the shots at the fund -- has tried to lock in current policies with the $30 billion loan. Most of it will be disbursed in 2003, allowing the IMF to pressure the new president -- and even the current candidates. President Cardoso, responding to the continued slide of Brazilian bonds and currency even after the $30 billion loan was announced, has stepped up the pressure. Raising the specter of past inflation, he told the media two weeks ago that "the candidates, whether they want to or not, will have to commit to these [IMF] agreements." And they should work on making themselves appear believable when they do so, he added.
But improved acting skills will not solve the debt problem. Brazil's bond prices are falling because the smarter bondholders have done the arithmetic and concluded that the debt is unpayable. The opposition candidates are not being selfish by refusing to accept IMF conditions. Why should Lula, for example, commit himself to an indefinite future of extremely high interest rates, slow (or no) growth and nothing for the poor -- in a country with the worst income inequality in the world -- just so foreign creditors can squeeze more debt service out of the country?
The alternative is to negotiate a debt write-down and restructuring sooner rather than later, and in an orderly manner rather than through a meltdown. The banks that made loans at rates of more than 20 percent got these high returns because there was a risk; now they must accept that risky loans sometimes go sour. If the IMF insists on bailing out the banks at taxpayers' expense, as it is currently doing, then the Fund, too, should share the losses.
Some have suggested that Brazil could go the way of Argentina if it does not follow the IMF's prescriptions. But Argentina ended up in a serious depression precisely because it did what the IMF advised. Brazil is fortunate that despite the IMF's best efforts, its fixed exchange rate (one real to one dollar) collapsed nearly three years earlier than Argentina's. So it will not have to face both devaluation and default at the same time.
More importantly, as a big country with the world's ninth-largest economy, Brazil will have more bargaining power. The IMF, as head of a creditors' cartel that has an interest in punishing Argentina for its default, has been brutal to that country. Neither the Fund nor the U.S. Treasury Department, which controls it, will be able to do the same to Brazil.
There is no need for Brazil to surrender to the IMF and other creditors its right to choose its own economic policies. IMF officials believe they know what is best for Brazil, and even 20 years of failure is not enough to persuade them -- or the Bush administration -- to consider that Brazilians might be better off charting their own course. But they will be.