Brazil in Looming Collapse
By Paul Lam
Senior Markets Writer
Brazil, similar to Russia, is promptly approaching a situation of state debt default. If that occurs, the outcome is expected to be 10 times the direct impact of the Russian debt crisis on U.S. financial institutions.
According to estimates, Brazil's foreign debt will reach approximately $481 billion by the end of this year, the largest amount of debt borne by any so-called emerging country in the world and two-and-a-half times the amount of foreign debt in Russia. U.S. financial institutions, as one would expect, are far more involved in Brazil than they are in Russia -- direct exposure to Brazil by U.S. banks stands at around $35 billion, almost five times the $7.7 billion to Russia.
In addition to the problem of foreign debt, there is the broader concern of Brazil's public debt, both foreign and domestic in nature, which has been rising dramatically at the rate of 40% per annum. From May to September, for example, Brazil's public debt grew at an astounding rate of 100% per year. On August 17, the day when Russia declared debt moratorium, Brazil and other governments were unable to roll over any debt that banks were holding, which sent the value of Brazilian public debt to an immediate collapse. In the month of September alone, Brazil's pubic debt plunged by over $40 billion.
Another $40 billion-plus in Brazilian debt will be due at the end of this month, and it is quite unlikely that a roll over will consummate. Large sums of money have departed Brazil in the fashion of capital flight and converted into dollars. In the months of August and September alone, an estimated $25 to $30 billion escaped Brazil in panic.
In the wake of a nearing crisis, the International Monetary Fund and other G7 lenders are in the final steps of preparing a $30 billion rescue package, but it would be naïve to expect the IMF-led bailout to save Brazil from massive default. First, it is apparent that Brazil will need more in the range of $300 billion, not $30 billion, to stem the kind of speculative debt attacks that have plagued other emerging markets.
On a political note, it is clear that due to conflicting forces, President Cardoso will face obstacles in his attempt to carry out any IMF austerity program in Brazil. "President Cardoso is gambling, double or nothing, on a bet he has already lost," said the chief of the Sao Paulo industrialist federation, the largest and most powerful business federation in Brazil. Such statements have echoed repeatedly in Brazil's political circles.
In the meantime, peril draws closer. After the $30 billion fiscal austerity was announced, funds have continued to leave Brazil at a rate of $1 billion per day. It is questionable that Brazil can weather such bloodletting with its shrinking foreign reserves, so it appears there is a strong likelihood that the Brazilian debt bubble will burst in the few remaining weeks and months of 1998. When that happens, the rest of Ibero America will follow and shockwaves will be felt across the world.
wallstreetcity.com |
