[asia-apec 802] Brazil: financial crisis

[GABRIELA]

<excerpt>Date: Wed, 14 Oct 1998 13:16:08 -0400

From: Michel  Chossudovsky <<chossudovsky at sprint.ca>


	<bold>THE BRAZILIAN FINANCIAL SCAM


	by 


	Michel Chossudovsky

</bold>

Professor of Economics, University of Ottawa, author of <italic>The
Globalisation of Poverty, Impacts of IMF and World Bank Reforms</italic>,
Third World Network, Penang and Zed Books, London, 1997. (The book can be
ordered from twn at igc.org)  


Copyright by Michel Chossudovsky Ottawa 1998. All rights reserved. This
text can be posted and/or forwarded. To publish or reproduce in printed
form, contact the author at fax: 1-514-4256224, E-mail:
chossudovsky at sprint.ca  




In Brazil, a multi-billion dollar financial scam is in the making. The
IMF sponsored operation is a "re-run" of last year's speculative raids on
Southeast Asia which led to the confiscation of more than 100 billion
dollars of hard currency reserves. On Friday September 11th amidst
turmoil on the Sao Paulo stock exchange, some 1.7 billion dollars had
quietly left the country in a single day. In October, the pace of capital
flight (funneled  through the forex market) was running at the pace of
400 million dollars a day... 


The vaults of the Central Bank of Brazil were being ransacked by
"institutional speculators" with the tacit collusion of the government of
President Fernando Henrique Cardoso. The Brazilian authorities stood
idle: on instructions from their Wall street masters, no exchange
controls were to be instituted to mitigate  the outflow of money wealth.
In the words of Brazil's Finance Minister Pedro Malan, restrictions on
capital  movements  are counterproductive and would be conducive
"<italic>to all sorts of corrupt practices</italic>". (Jornal do Brasil,
5 October 1998). Instead, short-term interest rates had been artificially
boosted to 50 percent with a view to upholding Brazil's ailing currency.
(The exchange rate under the real-dollar peg varies between an upper and
lower level). According to J. P. Morgan in Sao Paulo, the cost of the
interest rate hike to the country  (in terms of added debt servicing
obligations) is a staggering 5 billion dollars a month. (Financial Times,
18 September 1998). It was a massive sell-out: 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.  The country is facing imminent
bankruptcy; the State apparatus is under the control of Brasilia's
external creditors. Moreover, Brazil's internal debt had almost doubled
in less than six months increasing from $145 billion in January to $254
billion in July (of which $45 billion are due in October)...


<bold>Wall Street calls the Shots


</bold>The same Wall Street money-managers who decide Brazil's
macro-economic agenda are major speculative actors well versed in the art
of market manipulation. Its a modern form of highway robbery: since July
1998, 30 billion dollars have been taken out of  Brazil. The loot has
been transferred into the private coffers of Western banks and into the
overseas dollar accounts of Brazil's financial elites. 


This confiscation of the nation's hard currency reserves is the result of
political manipulation. The speculators knew that the currency would be
devalued after the October presidential elections. They had already
converted their Brazilian reales into dollars using the forward foreign
exchange market. The conditions enabling the outflow of the country's
hard currency reserves  had been carefully worked out by the IMF and the
government of Fernando Henrique Cardoso in consultation with the world's
largest commercial banks and brokerage houses. The central bank was to
uphold the Brazilian real by massively selling dollars in the forex
market. In other words, central bank reserves have been looted. The
reserves are being privatised...  


<bold>Demise of the Central Bank

</bold>

This process marks the demise of Brazil's central bank. Brazil's foreign
currency reserves have fallen from $78 billion in July 1998 to $48
billion in September. And now the IMF has offered to "<italic>lend the
money back</italic>" to Brazil in the context of  a "Korean style" rescue
operation which will eventually require the issuing of large amounts of
public debt in G-7 countries. The Brazilian authorities have insisted
that the country "is not at risk" and what they are seeking is
"<italic>precautionary funding</italic>" (rather than a "bail-out") to
stave of  the "contagious effects"of  the Asian crisis.  Ironically, the
amount considered by the IMF (30 billion dollars) is exactly equal to the
money "taken out" of the country (during a 3 month period) in the form of
capital flight.(See Peter Muello, "IMF Support Lifts Brazil Economy",
Associated Press, 9 October 1998).  But the central bank will not be able
to use the IMF loan  to replenish its hard currency reserves. The
bail-out money (including a large part of  the $18 billion US
contribution to the IMF approved by  Congress  in October) is intended to
enable Brazil to meet current debt servicing obligations, --ie. to
reimburse the speculators.  The bailout money will never enter Brazil.


<bold>Behind the Scenes Negotiations


</bold>The Southeast Asian bailouts constitute a "<italic>dress
rehearsal</italic>" for similar multi-billion schemes  to be adopted in
Latin America's largest economies. During the annual meetings of the IMF
and the World Bank in October, behind the scenes discussions were held
between Brazil's Minister of Finance Pedro Malan and William Rhodes,
Vice-President of Citibank representing Brazil's external creditors.
Ironically, these negotiations were being held at a time when G-7
leaders, anxious to appease public opinion, had called for controls on
short-term capital movements. As ministers of finance were meeting behind
closed doors, the representatives of some 300 global banks had gathered
in parallel sessions under the auspices of their Washington think tank,
the Institute of International Finance. The global banks were inviting
the IMF "<italic>to sharpen [rather than soften] its techniques of
surveillance</italic>" as well as strengthen its collaboration with the
private financial sector. (See Dr. George Blum, Chairman of IIF, Opening
Statement, Press Conference, Institute of international finance,
Washington, 3 October 1998).


President Fernando Henrique Cardoso had already signed a "Letter of
Intent" which commits the Brazilian authorities to massive austerity
measures. The latter will require substantial lay-offs of federal
government employees as well as a curb on  transfer payments to the state
governments. In the words of Demosthenes Madureira de Pinho Neto, the
Central Bank's director of foreign operations: "<italic>the budget
adjustment will be dramatic, definitive and permanent"</italic>. To
"restore business confidence" (according to a representative of Goldman
Sachs),  Brazil must  implement  "<italic>an overshoot on fiscal
adjustment</italic>" (well beyond the austerity package  imposed by the
New York banking committee in 1994 under the Real Plan).  The "economic
therapy" required to restore "the faith and trust" of foreign investors
will result in further bank failures and mass  unemployment. 


Under the Presidency of Fernando Henrique Cardoso, the creditors are in
control of the State bureaucracy, of its politicians. The State is
bankrupt and its assets are being impounded under the privatisation
programme... The Real Plan  initiated in 1994 --with the blessing of
Brazil's Wall Street creditors has reached a dangerous turning point. A
new lethal phase of economic and social destruction has commenced: to
ensure the swift payment of debt servicing obligations, the IMF will
require cuts in the budget deficit of the order of 20 billion dollars
(ie. 3 percent of GDP) to be implemented in the immediate aftermath of
the elections. 


Large portions of  the national economy will be put on the auction block.
The privatisation programme (envisaged under the Real Plan) will be
speeded up: public utilities including State telecom and electricity
companies are to be sold off  at bargain prices to foreign capital. The
federal government has also envisaged legislation which will allow for
the privatisation of municipal water and sewerage. However, the modest
proceeds of these sales will only enable Brazil to meet a fraction of its
debt servicing obligations.


<bold>Renewed Inflation


</bold>Currency devaluations in the aftermath of the elections will
trigger an inflationary spiral leading to a further collapse in the
standard of living. Substantial increases in sales taxes required under
the  bailout will also contribute to compressing real purchasing power.
The proposed hikes in State revenues (to be raised  largely from higher
levels of taxation and the proceeds of the privatisation programme) are
of the order of R10 billion ($8 billion).   


<bold>Impoverishment and Social Devastation


</bold>In a country where more than half the population is already below
the poverty line, the impacts of an the IMF bail-out  will be
devastating. Large sectors of Brazil's population of 160 million people
will be driven into abysmal poverty. Entire regions of the country will
be pushed into recession. The central government will be weakened: with
the impending fracture of the federal fiscal structure, State governments
will be left to their own devices. The country's regions will become
increasingly balkanised; as in Indonesia and Korea, Wall Street
investment houses will be invited to "pick up the pieces".


<bold>The Global Economic Crisis at a Dangerous Cross-Roads


</bold>The social impact in Latin America (where the IMF sponsored
strucutral adjustment programme  has been routinely applied for more than
ten years) is likely to be far more destructive than in Southeast Asia. 
While G-7 leaders have formally acknowledged  some of the shortcomings of
the IMF's interventions,  the application of "strong economic medicine"
is still part and parcel of the Latin American agenda. In recent months,
currency devaluations have swept the continent. In Mexico, exacerbated by
high interest rates,  the internal debt has spiralled. In Peru, a general
strike in October --in protest against the IMF sponsored reforms of
President Alberto Fujimori-- was brutally repressed by units of Army. In
Argentina, the central bank already operates as a de facto "currency
board" under the guidance of its external creditors. In a new wave of IMF
sponsored privatisations, Argentina's largest commercial banks are being
liquidated and sold off  to foreign investors at bargain prices... 


The global crisis has reached a dangerous cross-roads as speculators and
creditors extend their grip into Latin America: the IMF sponsored
financial scam (implemented in Russia and Southeast Asia) is  to be
inflicted on Latin America's largest economies:  Brazil, Mexico,
Argentina and Venezuela. Washington's "hidden agenda" is to take over
productive assets and recolonise the continent. 

 


    Michel Chossudovsky

    

    Department of Economics,

    University of Ottawa, 

    Ottawa, K1N6N5


    Voice box: 1-613-562-5800, ext. 1415

    Fax: 1-514-425-6224

    E-Mail: chossudovsky at sprint.ca

    http://www.interlog.com/~cjazz/chossd.htm    


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