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Pastimes : The Naked Truth - Big Kahuna a Myth -- Ignore unavailable to you. Want to Upgrade?

To: MythMan who wrote (8963)	10/20/1998 9:21:00 AM
From: Cynic 2005	Read Replies (2) \| Respond to of 86076

Brazil behind us? I don't think so: --------------------- October 19, 1998 Review & Outlook An IMF Kiss for Brazil? As the International Monetary Fund draws closer to putting together a rumored $30 billion line of credit for Brazil, private banks are backing off from an earlier willingness to put their own money behind a rescue plan. Coincidence? We don't think so. In early September, bankers meeting at J.P. Morgan in New York were reported as ready to participate, Brazil being their fifth largest foreign market and Latin America's biggest domino. But when Matt Murray and Pamela Druckerman rechecked for our International page last week, they found a "wait and see" attitude. Indeed, some banks have already been cutting credit lines and retreating. The duty of the banks, of course, is to protect their own deposit bases and shareholders, and it's hard to fault them for lack of statesmanship. They certainly do have an interest in a Brazil rescue plan that works. But when Treasury Secretary Robert Rubin starts to talk of "private sector burden-sharing," they have to wonder whether they're being harnessed to the same IMF that has displayed its rescue talents in Indonesia. Of course, Brazil has a role in all of this. Neither the IMF nor the private banks can do much without a credible plan to persuade the markets that the government there has a chance to curb its own fiscal crisis. An internal package was expected shortly after the re-election of President Fernando Henrique Cardoso on October 3, but now apparently is being delayed until after the October 25 runoff elections in Sco Paulo and other important states. With both the internal plan and the IMF package still up in the air, banks are understandably hesitant to make further pledges. Given the recent role of the IMF, famous for pressuring countries to float their exchange rates, its presence may melt confidence rather than build it. We certainly wouldn't blame the banks for standing back if the IMF and Treasury are holding the door open for them to leave. As Milton Friedman asked on this page last week, "If someone offers you a gift, is it immoral for you to accept it?" Without the IMF, indeed, bankers might find it in their interest to work things out with Brazil, which has repeatedly vowed to defend the real. In recent days there has been some talk of a $5 billion asset-back government bond issue, but banks remain more than skittish. Part of the problem is that maybe an IMF blessing is a kiss of death. Having let things get so bad, the IMF and the U.S. Treasury now face a kind of financial Kosovo: No solution is appealing. One of the big difficulties is the trade-off between financial sector stability and moral hazard. Brazil is perhaps too big to fail; no one wants the money-center banks falling apart, and thus we have what amounts to a bank bailout. On the other hand, with moral hazard so rampant, a fat $30 billion with no responsibility on the part of the lenders sets yet another bad precedent. If nothing is done differently this time, the global meltdown scenario will unspool once again: In the interest of U.S. financial-sector stability, the IMF line of credit will support the U.S. banks' exit, battered but still solvent; and the IMF will proceed with its nostrums, which if history be the guide will devastate Brazilians. The potential for an Asian rerun is what terrifies international investors. If Mr. Rubin wants the banks to "burden-share" in a bailout of Brazil -- and the IMF and the Treasury want to preside over stabilization -- a little more incentive is in order. The first thing he could do is announce his support for the Real Plan, which pegs the Brazilian currency to the dollar on a predictable sliding path. This would be a carrot, or encouragement to the banks, which already have a lot at stake. By restoring confidence in the real, bankers might be more motivated to stay, open lines of credit and work with Brazil. Instead they're in the dark and on edge about whether the IMF is scheming to undermine another currency. On Brazil's part, it needs to resist any such advice rather than to surrender and push millions of Brazilians into poverty. Indeed, it would be wise not only to start paring the fiscal deficit, but to move toward a stricter monetary regime, replacing the sliding peg with something like the Argentine convertibility law. Argentina won IMF support to help it sustain peso stability; one of its officials tells us you have to have very strong convictions when dealing with the IMF, otherwise you cannot defend your currency. With this in mind Brazil should take a page from its neighbor's playbook and make some of its own demands on the IMF and Treasury. Above all, Brazil should ask for one simple announcement -- that the worthies in these august institutions will support exchange-rate stability rather than undermine it.