Brazil Politics Seen Key To Weekend Talks In Washington
By DAMIAN MILVERTON
Dow Jones Newswires
WASHINGTON -- When Brazil's finance minister and central bank chief arrive here Saturday for crisis talks with U.S. government and multilateral financial institutions, their evaluation of the political climate in their homeland could prove more crucial than plans for a new currency regime.
Policy analysts in Washington believe the burst of instability that rocked Brazil's markets and eventually freed the real from its trading band stemmed from concerns over the fitful pace of economic reforms and the rebellion of a state governor on debt repayments to Brasilia.
Any plans put forward this weekend by Pedro Malan and Francisco Lopes - respectively Brazil's finance minister and central bank president - will need to be accompanied by virtually ironclad guarantees they won't be negated by Brazilian politics.
"Rational people simply do not wish to make investments or keep their money in this confused, disorganized and uncertain environment," said Michael May, a director of the Mercosur project at the Center for Strategic and International Studies in Washington.
The Brazilian central bank announced earlier Friday it wouldn't intervene to support its currency, the real, and effectively removed it from a new, wider trading band set Wednesday.
With the U.S. Treasury and the IMF staunch advocates of free market policies, any plans by Brazil to move toward a new foreign exchange policy with a floating real are unlikely to meet much argument in Washington.
But discussions over the political handling by President Fernando Henrique Cardoso's administration of its crucial structural reform package could be a little more heated. Washington insiders believe the IMF is chagrined by the Brazilian government's fumblings in trying to push reforms through Congress, which in December recoiled by rejecting a major pension plan reform.
"People are not going to flee the economy because of higher interest rates or otherwise right now but they will pull out if they feel that Congress isn't going to pass the reform program," said Jeffrey Schott, senior fellow at the Institute for International Economics.
"If the float is accepted as the new exchange rate regime, it will need a renewed commitment that the reforms will pass through Congress for it to be effective," he said.
Brazilian authorities plan to unveil their strategy for a new Brazilian foreign exchange system Monday, leaving time for Malan and Lopes to consult the International Monetary Fund, the World Bank, the Inter-American Development Bank and U.S. Treasury department during the weekend.
Financial markets greeted the prospect of a floating real with unrestrained jubilation Friday, with the Bovespa stock index rocketing a remarkable 33% as investors stampeded back into the market.
The IMF said freeing the real "appears to be a wise move to stop the loss of reserves," adding that its senior executives had been consulted by Brazilian authorities in advance of Friday's changes.
Treasury Secretary Robert Rubin echoed the thoughts of policy analysts when he said late Friday that providing further financial aid to Brazil is not an option.
Lawrence Summers, Rubin's second in command, will meet Malan and Lopes Sunday and is likely to reinforce the view that swift implementation of reforms is essential to any plans they might have to restoring investor confidence.
The IMF was reportedly deeply concerned by this week's sharp increase in capital flight from Brazil, which raised the prospect that a sizable part of the $41.50 billion it arranged for Brazil from international lenders last November could disappear defending the real.
"They are not going to top up the rescue package," Schott of the IIE said.
Instead, the Brazilians and their Washington allies will need to review the impact of a changed currency system on the economic projections contained in Cardoso's fiscal restructuring blueprint and determine whether the reforms can still be implemented fast enough to assuage market concerns.
Some policy analysts believe that waiting for a resumption of Brazil's Congress in February is no longer an option. Instead, Cardoso might need to implement some measures using executive privilege without immediate Congressional approval.
The risk to this strategy is that such measures still need to be ratified by Congress and defeat of reforms already made law would cause far greater destruction in financial markets than seen this week.
Moving immediately to a free floating currency also holds dangers that weren't reflected in Friday's astonishing reaction to the central bank's decision to step back from the market.
Leonardo Freire, associate director at Warburg Dillon Read in Sao Paulo, hopes the central bank sets a wide trading band Monday, with the average rate at BRR1.47, its closing level on Friday, as a mid-point of the new band.
This is seen as the most palatable option by those who feel the market isn't ready for a free float in such an unstable environment, no matter what exuberance might have greeted the initial prospects of a floating currency.
If the real was freed to float, any sharp and unchecked fall in its value would increase Brazil's considerable dollar-linked debt burden, which recently stood at $226.5 billion. Around $30.00 billion of this total must be repaid before the end of the year.
-By Damian Milverton, +202-862-9272; damian.milverton@dowjones.com. (Stephen
Wisnefski contributed to this article.)
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