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Non-Tech : Derivatives: Darth Vader's Revenge -- Ignore unavailable to you. Want to Upgrade?

To: Worswick who wrote (791)	2/7/1999 10:50:00 AM
From: Worswick	Read Replies (1) \| Respond to of 2794

Have we tucked the children in yet? Or, are they still running around out there making trouble for the neighbors? (C) New York Times For Private Use Only' February 7, 1999 Economic View: Why Did Brazil Burn? By DAVID E. SANGER AVOS, Switzerland -- When Russia's troubles seemed about to send Wall Street and the world over a cliff last fall, President Clinton announced a new strategy in the war against economic contagion. No longer would the International Monetary Fund and Washington wait for countries to get into deep trouble before coming to their aid. Instead, they would act ahead of disaster, stepping in with precautionary loans for fundamentally healthy economies. Brazil would provide the first test of the new strategy. It all sounded extremely sensible. Clinton's aides compared the strategy to a grand immunization program. Others conjured up images of alert firefighters spraying water on the roof of an intact house in a burning neighborhood. Scarcely three months later, the IMF's $42 billion preventive package for Brazil -- including a $5 billion commitment from the Treasury -- looks like another failed effort to stop the global economic crisis. Why did the $42 billion defensive line crumble so fast? And, assuming Brazil is not the last domino to fall, what do the events there portend for the coming year? "The Brazilian experience raises as a question whether it is feasible for the IMF to act in a preventative mode," said Jeffrey Shafer, a former Treasury undersecretary for international affairs and an architect of the 1995 Mexico bailout. "Perhaps all they can be is an ambulance corps." At the heart of the failure was a bet that turned bad. Treasury Secretary Robert Rubin and his deputy, Lawrence Summers, signed on to the deal because they were relatively confident that the government of Brazilian President Fernando Henrique Cardoso had the clout to execute the economic changes it promised in return for the aid. "These are all probabilistic decisions," Rubin said recently. "You make the best decisions you can based on the information you have at the time. You can't judge these things by how they turned out, post facto." In short, Rubin places his bets the way he did during a 26-year career on Wall Street, with the understanding that a certain percentage will go bad. But Washington operates on different rules, and already there is sniping on Capitol Hill that Rubin placed too much confidence in Cardoso, much as the Treasury bet too readily last summer that President Boris Yeltsin would execute economic changes in Russia. Both bets went wrong for essentially the same reason. Rubin and Summers negotiated with their counterparts, but the Russian Duma, and then the Brazilian Congress, failed to deliver. The budget cuts and other austerity measures were just too hard for politicians to swallow. It was the classic clash between the demands of the markets and the demands of populist politics. Needless to say, the workings of the Brazilian Congress and the Russian Duma are as different as the February weather in Brasilia and Moscow. But no doubt it was the experience of being seared in both legislatures that led Rubin, in a speech to the World Economic Forum in Davos, to say that when it comes to saving nations from economic implosion, "I have come to believe that the ultimate key is not economics or finance, but politics -- the art of developing support for strong policy, especially for the hard decisions that involve present sacrifice for future benefit." The problem with precautionary programs like the one the Treasury and the IMF tried in Brazil is that they can relieve the pressure on politicians to make those hard decisions. Clinton and Rubin hoped that the announcement of the huge package would give Cardoso the breathing room to bring a reluctant and famously free-spending Congress into line. It had the opposite effect. With the $42 billion package in place, Congress concluded that the economy was insulated from disaster, even if it dragged its feet on unpopular votes. "In retrospect, we took the heat off the Brazilians just when they needed to get energized," one senior administration official said recently. The only benefit, others in the administration say, is that the meltdown was postponed until January -- when it did less damage to the rest of the world than it might have in October. The Brazil experience, though, is worth remembering when judging some of the other ideas floating around about how to stabilize the world financial system. One is to "prequalify" countries for aid in the event of a crisis. The country in question would demonstrate to the IMF that it practiced safe economics -- no wild spending, a minimum of crony capitalism and corruption, real oversight of its banking system. In return, the IMF would promise to come to its aid if the markets ever staged a run on the country. What would happen, though, if the country fell off the wagon? Announcing that its government no longer qualified for protection would be the equivalent of throwing the nation to the sharks. Even without such a declaration, investors would sniff any failure to act, and race for the exits. Just ask Cardoso, who will now spend the rest of the year trying to rebuild the confidence he lost by waiting too long.