Brazil austerity plan fails to lift Latam debt
Reuters, Wednesday, October 28, 1998 at 11:52
By Hugh Bronstein
NEW YORK, Oct 28 (Reuters) - Brazil's deficit reduction
plan outlined Wednesday morning failed to lift emerging market
debt from its recent slump and U.S. analysts said prices may
stay down until the the struggling nation starts implementing
the reforms.
"This market is going to be highly skeptical of any program
that does not deliver on Day One but assumes things will be
delivered somewhere down the line," said Paul Masco, chief
emerging markets debt trader at Salomon Smith Barney Inc.
The government plans to shrink its budget deficit by 28
billion reais by cutting spending and boosting taxes and
pension contributions in 1999.
"This is typical of every Brazilian package that has ever
been put together," Masco said. "You're always waiting for the
real reform and the real spending cuts to occur and it doesn't
always happen."
About a year ago Brazil's government announced a similar
but smaller austerity package. But analysts said that program
was derailed by the temptation of the government to spend
during an election year.
"That's what got Brazil into the current crisis," said
Denis Parisien, Latin American strategist at Dresdner Kleinwort
Benson.
But this time around Brazil has imported credibility by
getting a commitment from the International Monetary Fund for a
bailout of roughly $30 billion, he said. As a condition of that
deal the IMF will monitor progress.
Brazil is the largest economy in Latin America, a region
hit hard by the risk aversion that followed Russia's debt
default in August.
The focus has now switched to politics as the government
tries to execute the austerity plan.
On Sunday Mario Covas, an ally of Brazil's President
Fernando Henrique Cardoso, won reelection in the key state of
Sao Paulo, bolstering the president's influence over the
country's unpredictable Congress.
But the victory of opposition candidates in Brazil's three
other big states -- Rio de Janeiro, Minas Gerais and Rio Grande
do Sul -- might complicate the president's attempts to recruit
local governments in Brazil's fiscal drive.
"Based on the way the governorships went, getting the
current Congress to agree to these reforms is going to be
difficult," Masco said.
But if Cardoso does make progress in Congress early next
month, emerging debt prices may bounce back, said Siobhan
Manning, Latin American debt strategist at PaineWebber.
"Cardoso has to come out strong, so he's first going to
target some of the toughest measures, the amendments to Social
Security," Manning said. "If he is able to get them approved
next week or the week after, it will set a positive tone."
Carl Ross, who heads Latin American sovereign research at
Bear Stearns & Co., said he is concerned about one of the
proposed measures that would increase the amount that financial
institutions pay into Brazil's Social Security system.
"It's probably fair, but it's problematic for banks that
will have to cough up more money to the government for every
employee they have," Ross said. "With the economy going into
recession and interest rates high, Brazilian banks are already
under a lot of pressure."
The government expects gross domestic product to decline
one percent next year while Ross said that drop could easily
reach two or three percent.
Copyright 1998, Reuters News Service |
