Brazil Seeks IMF, U.S. Backing For Throwing Float
Reuters [OL]
Saturday, January 16, 1999 1:55PM
By Michael Christie
BRASILIA (Reuters) - Brazil hoped to gain support from the United States and the International Monetary Fund on Saturday after Latin America's powerhouse economy threw its currency, the real, to the mercy of the markets.
Finance Minister Pedro Malan and Central Bank President Francisco Lopes were flying into Washington for weekend talks with U.S. Treasury officials and IMF chief Michel Camdessus.
German Finance Minister Oskar Lafontaine, currently chairman of the
European Union finance ministers, said in Frankfurt the EU would support the crisis-hit country.
''I will speak with Brazilian Finance Minister Malan by telephone this
afternoon and offer him support in the name of the European Union,''
Lafontaine told reporters.
The Brazilian mission to Washington followed its decision on Friday to stop defending the cherished currency and float it on world markets to avert a Russia-style financial collapse, which some feared would have reignited world economic turmoil.
The real closed off 8 percent from Thursday at 1.43 to the dollar. For the week, it fell 15 percent.
It was a painful loss in spending power for 160 million Brazilians, but the decision to abandon the backbone of Brazil's five-year anti-inflation plan did not, at least for now, amount to the economic meltdown some had dreaded.
Dollar outflows, which reached nearly $2 billion on Thursday, slowed to $300 million, traders said. Shares in Sao Paulo soared more than 30 percent on relief that Brazil had given up its potentially crippling fight against the market.
U.S. stocks and the dollar, which dipped this week on fears a Brazil crisis could hurt U.S. exports, posted strong gains.
But Brazilian newspapers warned the government not to be fooled into
underestimating the dangers ahead by the euphoric reaction of world markets. Commentators said inflation, recession, unemployment and deepening poverty now loomed.
''The real economy will pay a gigantic price,'' warned influential economic columnist Miriam Leitao in O Globo daily.
''The worst error the government could make now is to minimize the dangers ahead and believe the euphoria of the markets was proof that the worst had passed.''
Antonio Ermirio de Moraes, vice president of one of Brazil's biggest
companies, Votorantim, warned the harrowing inflation that haunted Brazil through the 1980s could return with a floating exchange rate.
''Our foreign exchange policy needs controlled bands in order to maintain order in the house. We're not disciplined, we're Latinos,'' he told the Folha de Sao Paulo newspaper.
The Central Bank was due to set new foreign exchange rules on Monday and could decide to return to a new, broader band of trading limits for the real or let it continue to float.
The next step is up to Malan and Lopes, who will be looking for support for Brazil's economic strategy and advice from the IMF and the U.S. government on the new foreign exchange rules.
In September, Brazil narrowly avoided a devaluation after the Russian
economic collapse when the IMF and other lenders rustled up a $41.5 billion bailout package. Terms of the deal did not contemplate a free float of the real.
Top industrial nations said the real's sharp devaluation left Brazil with no choice but to finally tackle the overspending that whittled away at investor confidence and led to severe capital flight. U.S. Treasury Secretary Robert Rubin said more aid for Brazil was not the answer.
Economists said they expected the talks with the IMF and the U.S. Treasury to be more an act of atonement for having sprung the changes on them with little advance notice.
The IMF said it had been consulted about Brazil's decision to stop defending its currency through dollar sales. But economists said an initial controlled devaluation on Wednesday of 8 percent was a bit of a surprise.
''What they are hoping to do is to explain to the IMF and the Treasury what they did this week and basically try and maintain the disbursements (of the rescue package) or even speed them up,'' said Carl Ross, managing director of Latin American sovereign research for Bear Stearns.
''It's a little hard for me to imagine they will get a very warm reception.''
Brazil's O Estado de Sao Paulo newspaper noted cold reality would probably win the international backers to Brazil's side.
''The Brazilian plea (for support) could be accepted by the IMF, taking into account the importance of Brazil in the world economy and that helping Brazil would avoid a crisis which could have very serious international consequences,'' it wrote.
Brazilians used to live in a surreal economic environment where inflation topped 2,000 percent a year. The economic stability program known as the Real Plan, drawn up in 1994 while Cardoso was finance minister, put a stop to that.
Anchored on a strong currency and high interest rates, the Real Plan brought inflation down to zero last year, restoring the pride of Latin America's industrial powerhouse.
Commentators said Brazil would now have to go back to the drawing board and work out a new economic strategy based no longer on a strong currency but on fiscal discipline. |
