-Caveat Lector-
Date: Wed, 27 Jan 1999 13:38:05 -0500
From: Michel Chossudovsky <[EMAIL PROTECTED]>
Subject: BRAZIL'S IMF SPONSORED ECONOMIC DISASTER
BRAZIL'S IMF SPONSORED ECONOMIC DISASTER
by
Michel Chossudovsky
Professor of Economics, University of Ottawa, author of The
Globalisation
of Poverty, Impacts of IMF and World Bank Reforms, Third World
Network,
Penang and Zed Books, London, 1997. (The book can be ordered from
[EMAIL PROTECTED])
Copyright by Michel Chossudovsky Ottawa, January 1999. All rights
reserved. To publish or reproduce in printed form, contact the author
at
[EMAIL PROTECTED]
This article follows an earlier article by the author (written before
the
crisis) entitled "the Brazilian Financial Scam", Third World
Resurgence,
November 1998;
The earlier article on Brazil is available at:
http://www.twnside.org.sg/souths/twn/title/scam-cn.htm)
The Speculative Onslaught: From East Asia and Russia to Latin America
As Wall Street speculators extend their deadly raids, the global
financial
crisis has reached a new climax. Succumbing to the speculative
onslaught,
the Sao Paulo stock exchange crumbled on Black Wednesday, 13 January
1998.
The vaults of Brazil's central bank were burst wide open; the Real's
"crawling" peg to the dollar was broken. Central Bank Governor Gustavo
Franco was replaced by Professor Francisco Lopes who was immediately
rushed off to Washington together with Finance Minister Pedro Malan
for
high level "consultations" with the IMF and the US Treasury.
Public opinion had been carefully misled; the "Asian flu" was said to
be
spreading... The global media had casually laid the blame on Minas
Gerais'
"rogue governor" Itamar Franco (a former President of Brazil) for
declaring a moratorium on debt payments to the federal government.1
The
threat of impending debt default by the State governments was said to
have
affected Brasilia's "economic credibility".
Brazil's National Congress was also blamed for asking deceptive
questions
and for not having granted in December a swift and "unconditional
rubber-stamp" to the IMF's lethal economic medicine. The latter
required
budget cuts of the order of 28 billion dollars (including massive
lay-offs
of civil servants, the dismantling of social programmes, the sale of
state
assets, the freeze of transfer payments to the State governments and
the
channelling of State revenues towards debt servicing).
Shuttle Diplomacy
On the weekend of January 16-17th, Finance Minister Malan and Central
Bank
Governor Lopes were in Washington for high level talks, on Saturday at
IMF
Headquarters and on Sunday at the offices of the US Treasury. "Some
officials in Washington were [at first] outraged by the lack of
consultation by Brasilia over the original decision made late on
Tuesday
[the 12th] to abandon the Real peg given the time and effort put into
the
original [IMF sponsored] programme [negotiated in November 1998]".2
IMF Managing Director Michel Camdessus later admitted that "the
decision
was a wise move to stop the loss of reserves" while emphasising that
he
expected Brasilia to meet the fiscal targets under the Fund's
financial
package signed in November. The flexible exchange rate regime was also
approved on condition the "extremely high" domestic interest rates
remained in force and that no foreign exchange controls be introduced
(which might prevent institutional investors from moving their money
in
and out of the country).
Squeezing Credit
In insisting on tight monetary policy, the Washington based
institutions
were also intent on destroying Brazil's industrial base, taking over
the
internal market and speeding up the privatisation programme. The
government overnight benchmark interest rate was increased to a
staggering
32.5 % (per annum) implying commercial bank lending rates between 48.7
%
and 84.3 % per annum.3 Local manufacturing crippled by unsurmountable
debts had been driven into bankruptcy. Purchasing power had crumbled;
interests rates on consumer loans were as high as 150% to 250% leading
to
massive loan default...4
Endorsement by the Washington Consensus
Barely a few days after Black Wednesday, in a prepared press
statement,
IMF Managing Director Michel Camdessus welcomed "...the reaffirmation
of
fiscal consolidation as the foremost priority (...) together with the
structural and privatisation measures which are part of the agreed
program
with the Fund".5 World Bank President James Wolfensohn and Vice
President
Joseph Stiglitz -- known for his recent critique of the IMF's high
interest rate policy in East Asia-- also provided their firm backing:
"We
are pleased with Minister Malan's final account of his Washington
meetings, and welcome his invitation to intensify our dialogue."6
Increase in the Price of Bread
On Monday morning January 18th, the Sao Paulo stock exchange had
temporarily recovered, regaining some of its losses. While
"confidence"
had been reinstated, the Real had lost more than 20 percent of its
value
in less than week. By late January it had declined by more than 40
percent, leading to an almost immediate surge in the prices of fuel,
food
and consumer essentials. The price of bread increased immediately by
ten
percent. The demise of the nation's currency had contributed to
compressing the standard of living in a country of 160 million people
where more than 50 percent of the population are below the poverty
line.
In turn, the devaluation had backlashed on Sao Paulo's Southern
industrial
belt where the (official) rate of unemployment had reached 17 percent
in
1998. In the days following Black Wednesday January 13th,
multinational
companies including Ford, General Motors and Volkswagen confirmed work
stoppages and the implementation of massive lay-offs of workers.7
Getting the Green Light from Wall Street
After his busy weekend schedule in Washington, Finance Minister Malan
hurried to New York for an early morning encounter (Wednesday the 20th
of
January) at the Federal Reserve Bank: on "the breakfast list": Quantum
Hedge Fund George Soros, Citigroup Vice-President William Rhodes, Jon
Corzine from Goldman Sachs and David Komansky of Merrill Lynch.8
This private meeting held behind closed doors with Brazil's "creditors
of
last resort" was crucial: Rhodes had headed the New York Banking
Committee
on behalf of some 750 creditor institutions; he had first dealt with
Fernando Henrique Cardoso (when he was Finance Minister) to negotiate
the
restructuring of Brazil's external debt under the Brady Plan.9 The
latter
coincided with the launching of the 1994 Real Plan on behalf of
creditors
and speculators. The pegged exchange combined (with the structure of
high
interest rates under the Real Plan) served to boost the internal debt
from
60 billion in 1994 to more than 350 billion in 1998...
Although the results of the breakfast meeting were not made public,
Bill
MacDenough of the Federal Reserve Bank (who had carefully organised
the
event), confirmed that Brazil's external and internal debts were
considered to be within manageable limits: "it is not necessary [at
this
stage] to reschedule Brazil's external debt".10 Caving in to his Wall
Street masters, Finance Minister Malan fully acquiesced: there will be
"no
renegotiation" nor debt forgiveness for Brazil...11
Background of the IMF Agreement
At first sight, the plight of Brazil appears as a standard "re-run" of
the
1997 Asian currency crisis. The IMF's lethal "economic medicine" is
broadly similar to that imposed in 1997-98 on Korea, Thailand and
Indonesia. Yet there was a striking difference in the "timing" (ie.
chronology) of the IMF ploy: in Asia, the IMF "bailouts" were
negotiated
on an ad hoc basis "after" rather than "before" the crisis. In other
words, the IMF would only "come to the rescue" in the wake of the
speculative onslaught, once national currencies had tumbled and
countries
were left with unsurmountable debts.
In contrast, in Brazil the IMF financial operation was negotiated
"before"
as part of a new standing IMF-G7 arrangement. The "economic medicine"
was
meant to be "preventive" rather than "curative". Officially it was
intended as a means to "prevent the occurrence" of a financial
disaster.
Moreover, the money under the preventive scheme was made available
"upfront" "before" (rather than in the wake of a currency
devaluation).
Preventive Economic Medicine
This "preventive scheme" announced by President Clinton was launched
in
late October. the leaders of Group of Seven nations had agreed "to
help
economically healthy nations" stave off the dangers of currency
speculation. A multi-billion dollar "precautionary fund" had been set
up.
Its stated objective was to prevent the "Asian flu" from spreading to
other regions of the World...12.
Brazil was first in line under the IMF-G7 scheme: part of the money
had
already been earmarked to support President Fernando Henrique
Cardoso's
"efforts at stabilising" the Brazilian economy. Barely two weeks later
on
November 13th, the government of Brazil submitted its "Letter of
Intent"
addressed to the IMF Managing Director Michel Camdessus. Attached to
the
letter was the "Memorandum of Economic Policies" carefully drafted in
the
usual economic jargon in conformity with IMF guidelines.
Detailed negotiations on a multi-billion dollar package (equivalent in
real terms to "half a Marshall Plan") had been carried out. Already in
July 1998, Washington had instructed Brasilia not to tamper with the
rules
governing the multi-billion dollar futures and options trade on the
Sao
Paulo exchange: "temporary exchange controls would have defused the
situation, but that is a no-no in the IMF's books, because it would
undercut the lucrative games of international finance..." 13
Lucrative?... The sheer magnitude of the money appropriated is
mind-boggling: during a 6-7 month period (July 1998-January 1999) 50
billion dollars of foreign currency reserves (largely transacted
through
BOVESPA options and futures contracts) had been appropriated by
private
financial institutions. Equivalent to 6 percent of Brazil's GDP, the
money
confiscated through capital flight was to be "lent back" to Brazil in
the
context of the 41.5 billion dollar operation...
"Up Front Fiscal Adjustment"
In constant liaison with Brazil's Wall Street creditors, the main
Washington actors of this multi-billion dollar ploy were First Deputy
Managing Director Stanley Fischer at the IMF and Deputy Secretary
Lawrence
Summers at the US Treasury. The World Bank, the Interamerican
Development
Bank (IDB) and the Bank for International Settlements (BIS) were also
involved in putting the financial package together.
Imposed by Brazil's creditors, the IMF programme was to include:
"a large up-front fiscal adjustment of over 3 percent of GDP with
reforms
of social security, public administration, public expenditure
management,
tax policy and revenue sharing that confront head-on the structural
weaknesses that lie at the root of the public sector's financial
difficulties".14
Finishing touches to the multi-billion scam were completed at IMF
Headquarters in Washington in the night of November 12th; the
agreement
was formally announced by the IMF Managing Director Michel Camdessus
the
following morning in a press conference:
"I believe that the soundness of Brazil's program and the authorities'
commitment to it together with the strong support demonstrated by the
official international community provide the conditions for Brazil's
private creditors now to act to help ensure its success". 15
And who were these private creditors "helping to ensure its success"?
The
same Wall Street financiers (and their affiliated hedge funds)
involved in
the speculative onslaught against the Brazilian Real...
The IMF Agreement Contributes to Fuelling Capital flight
The 41.5 billion dollar financial package was intended to "restore
confidence". However, rather than staving off the speculative
onslaught,
the IMF sponsored rescue operation contributed to accelerating the
outflow
of money wealth. Twenty billion dollars were taken out of the country
in
the two months following the approval of the IMF precautionary
package: an
amount of money of the same order of magnitude as the massive
"up-front"
budget cuts required by the IMF.
Marred by capital flight, Brazil's money wealth was being plundered:
in
the months preceding the January financial meltdown, the outflow of
foreign exchange reserves was running unabated at a rate of 400 to 500
million dollars a day... Capital flight during the first two weeks of
January was of the order of 5.4 billion dollars (according to official
sources).
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