Steve, that's the official party line. Here's the inside scoop (about what finance ministers, bankers, and trading desks are thinking):
theStreet.com
Latin Loot: The Party's Over
By Peter Eavis
Senior Writer
10/6/98 2:42 PM ET
WASHINGTON -- The annual IMF-World Bank meeting is
without doubt the most important financial conference of the
year. Bankers, corporate honchos and government ministers all
come to schmooze, discuss deals, attend seminars and relax at
the parties and receptions, held in some of Washington's most
elegant buildings and fanciest restaurants.
This year, however, with the world economy in deep trouble and
the emerging markets in the emergency ward, much of the
joviality and swagger has gone. Fewer parties are being held:
Neither Salomon nor Credit Suisse First Boston had bashes
this year. Citicorp did have one, though, and just about everyone
-- from Bangladeshi loan officers to Mexican arb traders --
turned up.
Brazil Blues
No surprise: Brazil's problems dominate conversations. The
general feeling is one of pessimism. The budget deficit's too
big, the Brazilians are moving too slowly to change it and the
currency is overvalued. Devaluation and default are inevitable.
Here's a vox populi sample of what people are saying about the
world's ninth-largest economy:
The Grizzly Bear
Right at the bearish end of the spectrum is Rudi Dornbusch, an
economics professor at Massachussets Institute of
Technology. Known for his cantankerous and critical remarks
on Latin American policymakers, Dornbusch has been no
disappointment at the conference.
"There's no good news in Brazil," he declared at one seminar.
Will Brazil manage to come up with a sufficiently credible and
large set of budget cuts? the bedraggled German academic
was asked. He quipped: "You can't make a donkey sing."
'Brazil Is No Different from Russia'
This is the view of a Russia fund manager encountered at the
Citi party. She urged her colleagues to sell all their Russian
bonds just days before the Aug. 17 ruble devaluation. She
thought Russia's huge and expensive domestic debt would be
defaulted on -- and it was. "In Brazil, the situation's not that
different, she says. "Their debt is totally unsustainable."
The Banker Who's Prepared to Bankroll
Brazil has just under $60 billion in short-term dollar debt,
according to Deutsche Bank. If the lenders refuse to roll most of
this over, then Brazil's $45 billion of hard-currency reserves --
already down over $30 billion since April -- would be wiped out.
Interesting, therefore, to talk to a banker in charge of Latin
American trade finance, which makes up a fair proportion of
short-term debt to Brazil. He said: "We're planning to roll over in
Brazil. But only some banks will do this. The rest are being told
to get out of emerging markets. ... About half will not rollover."
That's scary, especially when you consider that Brazil has to find
another $45 billion to cover its current account deficit and
longer-term external debt in 1999.
The Lone Bull
"I may be in a minority of one in this room, but I believe the
Brazilians will get through this," said Tom Trebat, head of
emerging-markets research at Citibank. Trebat has faith that the
fiscal cuts will be large and credible. He'd better be right:
Citibank is the biggest foreign bank in Latin America.
Bickering Builders
If you had a dollar for every time you heard the phrase "new
financial architecture" at this conference, you'd be able to refloat
the Japanese banking system and still have change to deal with
Brazil.
This term refers to a plethora of proposals from all quarters.
They include sensible suggestions, like more transparency in
financial institutions, to crazy ones, like a huge pool of bailout
cash run by those frugal guys over at the United Nations.
Any new architecture would almost certainly come under the
control of the IMF and World Bank. But some of the most
powerful figures at these institutions are at loggerheads on
questions that would dominate any emergency lending.
Take the issue of whether Asian countries should have raised
interest rates as part of IMF rescue programs last year. Stanley
Fischer, first deputy managing director of the IMF, remarked
early on at this conference that anyone who thought Asia
could've got away without higher rates must be on drugs. A
couple of days later, at an ING Barings breakfast, Joseph Stiglitz,
chief economist at the World Bank, said that high rates were a
big mistake for Asia.
Profits of Doom
A couple of veteran emerging-markets debt traders, despite
seeing flows dry up, are not dispirited by the current crisis.
They're anticipating big defaults on emerging-markets
sovereign bonds by Russia and the countries of Latin America.
Once the dust settles, they will have a whole new market of
distressed debt to play with.
"It'll be just like it was in the mid-1980s after the Mexicans
defaulted," said one nostalgically. "We'll be there making a turn
just like we were back then."
Doug
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