U.S. Plans to Send Billions to Shield Brazil's Economy
By DAVID E. SANGER
WASHINGTON -- The United States is preparing to commit U.S. taxpayer funds
as part of a lending program of at least $30 billion to try to insulate
Brazil, and with it the rest of Latin America, from the worst effects of the
financial turmoil circling the globe, according to U.S. and foreign
officials assembling the program.
Details of the U.S. contribution, which is expected to total several billion
dollars in direct aid or loan guarantees, have yet to be negotiated. But
several congressional leaders have been alerted to the likelihood that the
administration would have to act while Congress is in recess.
This early warning from the administration reflects memories of how
Congress erupted with objections and hearings in 1995 when President Clinton
committed $20 billion in U.S. funds to the bailout of Mexico. But
administration officials said last week that their early soundings indicate
that members of Congress are deeply concerned about preventing an economic
collapse in Latin America that would resound in the United States, and thus
they expect few objections.
The timing of an aid package for Brazil -- originally expected within the
next few days -- is complicated by unexpected delays that have cropped up in
dealing with the Brazilian government.
The government of President Fernando Henrique Cardoso faces politically
risky gubernatorial elections on Sunday, which may well determine whether
Brazil can execute an austerity program that is the key condition for the
loans it is concurrently negotiating with the International Monetary Fund.
The biggest role in the rescue program for Brazil will be taken by the
International Monetary Fund, which said last week that it would contribute
at least $15 billion -- and appears to be under pressure from the United
States to do even more. Another $9 billion or so will come from the World
Bank and the Inter-American Development Bank, and the remainder from the
United States and other major industrial nations.
Germany and Japan, though, have been reluctant to take part, one U.S.
official noted, suggesting that Latin America is chiefly Washington's
problem, not their own.
So far, U.S. officials working behind the scenes to organize the aid package
have said nothing in public about the details of plans for a direct
contribution to Brazil.
"Brazil is very important to the economic well-being of the region, the
United States and the international community, and all of us are very much
focused on seeing how we can be helpful," Treasury Secretary Robert Rubin
said on Friday.
But in a wide-ranging interview about the global economic turmoil, Rubin
declined to say what strategy he would pursue in dealing with Brazil's
problems and insisted that no decisions had been made about how the United
States might contribute.
But he discussed Brazil as an opportunity to engage in the kind of
preventive financial diplomacy that President Clinton advocated in speeches
to the IMF and the World Bank here three weeks ago. At the time, Clinton
argued that the monetary fund should "provide contingent finance to help
countries ward off global financial contagion" rather than wait for disaster
to strike.
Direct U.S. aid to Brazil would clearly send a symbolic message: that after
a year of trying to manage the financial crisis through the monetary fund,
the United States is now ready to put a limited amount of its own capital at
risk to prevent further havoc -- not only for Brazil but to stop chaos
spreading to Argentina, Mexico and other countries that are major U.S.
trading partners.
That would be a change of strategy. So far, the United States has operated
almost entirely through international financial institutions, chiefly the
IMF But it would also be a risky move for President Clinton, economically
and politically.
Even though Congress objected to the $20 billion in U.S. funds committed to
the bailout of Mexico, it turned out that only $12 billion was ultimately
needed, and it has since been paid back, with interest. But Rubin noted on
Friday that "it's a very different environment now." Other administration
officials say they believe that there would be few objections in Congress to
direct U.S. participation in a Brazil bailout.
"I think there are a lot more people in Congress who are now scared to death
by what's been happening in the markets, and what could happen in their own
districts," a White House official said last week, "and they won't say much
as long as they don't have to vote on it."
By acting soon to stabilize Latin America, the administration is hoping to
capitalize on two weeks of relative calm after the late-summer panic that
engulfed Russia and, at its height, led to an outflow of a billion dollars a
day from Brazil, for fear that it would be the next country forced to
devalue its currency.
Whether this calm marks the beginning of a turnaround or just another pause
in the wildfires that have erupted since Thailand's currency crisis in July
1997 is a matter of considerable debate.
But many experts cite the confluence of several events that have reassured
jittery investors around the world: two successive interest-rate cuts in the
United States, Japan's long-delayed move to prop up its banking system with
$500 billion in taxpayer funds, and a steady strengthening of currencies in
Thailand, Indonesia and South Korea, the first signs that investors may be
preparing to return.
Always circumspect when it comes to commenting publicly on markets, Rubin
acknowledged that "in the last several weeks there have been a number of
significant, positive developments." But the former trader, burned during a
26-year career by many false market rallies, warned that "serious issues
remain" and that "it will take some time for the world to work its way out"
of what he has repeatedly called "the most serious international financial
disruption of the last 50 years."
In fact, Rubin's aides are clearly nervous about the possibility of another
outbreak that could set off a new round of panic, which has made it
virtually impossible for many emerging-market countries to borrow money on
world markets.
"Brazil and Japan are the two obvious tinderboxes," said Jeffrey Garten,
dean of the Yale School of Management, who served as undersecretary of
commerce for international affairs during Clinton's first term. "In Brazil,
the issue is whether the package that is coming together will really be big
enough to deal with an exploding debt problem. And in Japan the question is
whether there is real reform that goes along with the money."
But after spending 18 months in negotiations with the Japanese, Rubin
clearly senses that the United States has little leverage in Tokyo; its
problems are chiefly rooted in political gridlock, not lack of resources.
In Brazil, though, the United States has a better chance of buying time and
influencing an economic reform program, as long as it does not appear to be
dictating terms publicly to Cardoso and his team.
But demonstrating economic support will probably require tapping the
Exchange Stabilization Fund, created during the Roosevelt administration to
help stabilize the dollar. The money is under Rubin's control, with
presidential approval, and he reached into it to circumvent congressional
objections to aiding Mexico in 1995.
But the reaction was so strong -- for a time Congress restricted tapping the
fund for international bailouts -- that Rubin has been extraordinarily
cautious ever since.
He committed $3 billion in a "second line of defense" in emergency aid
programs for Indonesia and South Korea last year, but no money was
ultimately dispersed to either country. U.S. officials said that South Korea
did not need the extra help, and that the collapse of the Suharto government
in Indonesia so changed the political scene there that it would be too risky
to offer direct U.S. aid.
In the bailout of Russia -- whose economy collapsed after President Boris
Yeltsin abandoned an agreement to reform the economy and dismissed the
leading reformers -- the United States offered no direct help. Those events
set off a panicked exit by investors from all emerging markets, and greatly
worsened Brazil's troubles.
So far, Brazilian officials have successfully calmed the market by
constantly talking about a forthcoming aid program from the IMF, convincing
speculators that it would be dangerous to bet against the country. But at
the same time, the Brazilian officials have maintained the pose that they do
not really need the cash -- and are certainly in no hurry to get it.
U.S. officials and top officials of the IMF are clearly nervous, worried
that the longer the negotiations drag on, the greater will be the risk of
Brazil being caught in another round of market turmoil.
"The Brazilians want everyone to think that it's all under control," said an
investment banker involved in the talks. "But the fact is that there's still
a real risk that sometime in the next 18 months the government is going to
be forced to devalue" its currency, which is pegged to the dollar, but
adjusts about 7.5 percent a year in a carefully controlled fall.
To prevent a sudden devaluation, the Brazilian government has had to raise
interest rates to more than 50 percent, choking off credit for most
companies. Meanwhile, the country is slipping into recession.
The aid would buy time for the Brazilians, but it is contingent on Cardoso's
success in persuading the legislature to end huge deficits, chiefly through
unpopular cuts in social spending.
The first deputy managing director for the International Monetary Fund,
Stanley Fischer, spent Friday in Brazil to review the country's austerity
plan, which is expected to be announced after Sunday's elections but before
the international package, to avoid the appearance that the global lender is
dictating conditions to Brazil.
"Brazil has to do a lot," Fischer said last week before leaving on his trip.
"In return, I expect the international community will make a large
contribution." |
