Brazil's debt load could lead to crisis by late 2003
By Mark Wilkinson
WASHINGTON, June 27 (Reuters) - Brazil's heavy debt burden
could lead to an economic crisis by the end of 2003 unless it
is restructured as part of a sound economic program, an
economist at the Institute for International Economics said on
Thursday.
Morris Goldstein, an economist at the Washington think
tank, said that Brazil could not sustain its net debt for long,
a heavy burden which represents more than half of gross
domestic product in the largest economy in Latin America.
While an economic crisis of Argentine proportions was not a
short-term probability, he said that the Brazilian government
should push ahead with sound economic policies while
simultaneously restructuring its debt to avoid defaulting on
its obligations.
Were the debt burden to be ignored, the country could sink
into a crisis by the end of 2003, he said.
"When you have a high debt ratio you're more likely to be
on the edge of trouble even if recent behavior has been good,"
he said during a a presentation at the Institute for
International Economics.
And Brazil's behavior in managing its economy has in fact
been recognized as good. The International Monetary Fund
earlier this week praised the country's "outstanding" economic
track record and said that the government's commitment to sound
economic and monetary policies was "impressive."
A vote of confidence also came from the Group of Eight that
was convening in Canada on Thursday, as Canadian Prime Minister
Jean Chretien said that the G8 had faith in a "positive
outcome" in Brazil.
The nation's strengths, Goldstein said, also lay in an
efficient floating exchange rate, "sensible" monetary policy of
targeting inflation, "concrete signs of a sound fiscal policy,"
and the absence of capital flight, which plagued Argentina.
But in spite of solid monetary and fiscal policies and
support from the international community, Brazil still faces
serious hurdles, so big in fact that the country has eclipsed
Argentina's recent monopoly of the front pages of newspapers
business sections.
Equity markets slid steeply this year and investor
confidence faded, in part due to the electoral crisis ahead of
the October presidential elections and questions about whether
the next government will be able or willing to manage the
country's large debts.
THE ELECTORAL QUESTION
Left wing presidential candidate Luiz Inacio Lula da
Silva's topping of the polls worried foreign investors, as the
country's currency hit record lows, giving the central bank
very little scope to ease monetary policy.
Last week, U.S. Treasury Secretary Paul O'Neill played his
part in hammering the battered real by saying that "throwing
the U.S. taxpayer's money at a political uncertainty in Brazil
doesn't sound brilliant to me."
A senior White House official said Wednesday that O'Neill's
comments had been misinterpreted.
"The economic fundamentals remain strong. The political
uncertainties are political uncertainties, but economic
fundamentals remain strong," the official said.
Goldstein, however, said that the fundamentals were not as
strong as in 2000, when the Brazilian economy grew at an annual
pace of 4.5 percent. Last year, the IMF estimated, Brazil's
economy only grew 2.0 percent.
However popular Lula is in the polls now, he is not
guaranteed a sure victory in October as Brazil's uncertainties
could very well play in favor of the governing coalition, said
Riordan Roett, a professor at Johns Hopkins University.
"Brazilian voters are not particularly ideological, but
rather practical," he said. "There's a great deal of risk and a
great deal at stake."
But while uncertainties in the political sphere remain,
Goldstein stressed that "this is not the whole problem by any
means."
Exports remain low, syndicated loans to Brazilian companies
have been scaled back, and investment confidence from member
countries of the G7 is "poor" due mostly to turmoil in the
Middle East and trade tensions.
The country's "turbulent neighborhood," as Goldstein dubbed
the region that comprises Argentina, Ecuador, Uruguay and
Venezuela, was also a potential danger as all these countries
"are in varying degrees of trouble."
((Mark Wilkinson, Washington newsroom 202 898 8322))
REUTERS
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