Brazil is going to be a big story this year. The new elections are going to put in a far-left party, who will take the country into the toilet, and will result in a "Pinochet" type of overthrow.
I am posting the Times version of what will happen. It is interesting to note that both the story from the WP and the NYT start off by blaming "Globalization" for the problem, when it really is the inability of Brazilian Politicians to create a stable "rule of law" and money supply for the country. If the Military takes over, watch the predictable outcry.
October 6, 2002
Brazil May Not Stay Upright on a Shaky Global Stage
By EDMUND L. ANDREWS
WASHINGTON, Oct. 5 No matter who wins the Brazilian presidential elections on Sunday, the biggest loser could end up being the American recipe for globalization.
Few countries have won more praise on economic policy than Brazil, from both the Bush administration and the International Monetary Fund. Yet few are being punished as harshly as Brazil by foreign investors, who have been running for the exits for months.
With opinion polls pointing to a potentially big first-round victory on Sunday for Brazil's left-wing challenger, Luiz Inácio Lula da Silva, Brazil's currency has slipped to record lows and its government bonds are selling for about 53 cents on the dollar.
Most of the fear is that Mr. da Silva will relax current policies to cut spending, fight inflation and keep paying on Brazil's $240 billion public debt.
But a growing number of experts worry that Brazil will unravel even if Mr. da Silva keeps his recent pledge to hold down spending. A small but increasingly vocal number of investors also worry that a part of Brazil's current turmoil stems from problems in the global financial system itself.
"The system has broken down," declared George Soros, the billionaire hedge-fund investor, in a speech here last week. "It does not provide an adequate flow of capital to countries that need it and qualify for it."
The United States and the monetary fund have a lot riding on Brazil, politically as well as economically. Two months ago, the Bush administration supported a $30 billion loan package from the fund to calm the pre-election panic among foreign investors.
In supporting the loan, a stark departure from the administration's general opposition to international financial relief, Treasury Secretary Paul H. O'Neill said that the Brazilian government had pursued wise economic policies and that it deserved international support.
Treasury officials say Brazil can make it through its crisis. Regardless of whether Mr. da Silva's Workers' Party wins, they contend, investors will regain their confidence if the next government strongly adheres to the fund's loan terms. But banks and financial institutions are much less confident, and that means that Brazilian businesses find it harder and more expensive to get loans.
"When you look at the numbers, it's pretty tough to make them add up," said Larry Kantor, chief of global currency strategy at J. P. Morgan Chase.
Even though Mr. da Silva has said he will make good on Brazil's promises to the monetary fund, the country's currency has weakened every time he has risen in opinion polls.
"The markets have to assume the worst," said Rodrigo Azevedo, co-chief of Latin American research at Credit Suisse First Boston in São Paulo. "The markets have clearly not been willing to give Brazil the benefit of the doubt."
The worries are not limited to doubts about Mr. da Silva. Financial analysts note that Brazil's currency needs to get stronger, its interest rates need to come down and its growth needs to accelerate. Many of those things are out of its hands.
"The problem is, do you want to bet on something where everything has to go right?" said Peter Geraghty, managing director at Darby Overseas Investors, an investment company in Washington that has invested in Latin American bonds and stocks for years.
A financial meltdown in Brazil would have serious political implications for the Bush administration. It would probably increase disillusionment in Latin America toward policies based on open markets and could undermine the administration's effort to negotiate a free-trade agreement that covers all of central and South America.
It would also rekindle criticism of the monetary fund, which continues to push poorer countries into privatizing state-owned industry, opening their markets and fighting inflation.
Brazil embraced those policieswith fervor. But the policies have become wildly unpopular in many quarters, from impoverished dwellers of Rio de Janeiro's favelas to middle-class consumers and even among businesses struggling with the sky-high interest rates.
People familiar with the plan say that it is based on three major assumptions: that Brazil's currency, the real, would be worth about three to the dollar; that real interest rates, after inflation, would be about 8 or 9 percent; and that the economy would grow by 3 percent a year over the next 5 to 10 years. But none of those elements are in place right now.
The real's value has slumped to about 3.6 to the dollar from 3 to the dollar. If the rate does not improve, much of the government's debt will be higher than planned because many of its debt payments are linked to the value of the dollar.
Real interest rates, meanwhile, are running at about 11 percent. The rates that Brazilian consumers and businesses actually pay are more than 20 percent.
Brazilian growth, which has been hurt by the global slowdown, is expected to be less than 2 percent this year. Though many analysts believe growth could speed up significantly, they add that much depends on whether the United States and the world economy snap back as well.
Mark Weisbrot, an economist at the Center for Economic Policy Research, a liberal policy group in Washington, says Brazil will be buried by its debt simply if trends over the last few years continue.
Other experts contend that prospects are far from hopeless, noting that the government has more than $30 billion in reserves and will receive another $27 billion if it satisfies the terms of the monetary fund's loan agreement.
If Brazil fails to emerge from its current economic turmoil, one of the first casualties is likely to be President Bush's effort to negotiate a free-trade agreement with all of Latin America.
Even Brazil's current pro-business leaders have been extremely reluctant to lower import barriers, complaining that the United States' own barriers to agricultural products are far too high.
A continued meltdown in economic growth is likely to exacerbate Brazilian opposition. Because Brazil accounts for 40 percent of Latin America's economy, a pan-American free-trade pact without it would amount to very little.
But a failure in Brazil would also undermine the broader approach taken by both the United States and the monetary fund toward preventing financial crises.
"If this is the best we can do, limping from one crisis to another, then maybe it's time to reconsider those policies," said Mr. Weisbrot of the Center for Economic Policy Research.
nytimes.com |
