BRAZILIAN DEBT Eleventh Hour Bail-Out

...This new money will allow Brazil to pay off arrears totaling about $1.7 billion...

...As Bacha put it, "Even if the government wanted to, the country refuses to commit suicide.'" Rio Looks Like Baghdad Already there are so many vendors in the streets, Rio is beginning to look like Baghdad, observed Fernando Gasparian, international secretary of the opposition PMDB...

...maintenance of short-term credit lines for Brazilian banks at the levels prevailing in mid-1982...

...Unwilling to throw good money after bad, many would much rather collect their money or even write it off as a loss and forget Third World lending altogether...

...Economic Trio to Economic Duo The government's first reaction to the popular outburst of fury was to consolidate power within its own ranks...

...customers and a resulting drop in foreign exchange earnings...

...Three days of extremely violent rioting shook Sdo Paulo last April...

...and a climate of social tension and political turmoil, who is going to invest in Brazil...

...Small banks also complain about the hierarchical structure of banking, which allocates most, of the fees and charges involved in the renegotiations to the handful of 'lead banks,' leaving them with little more MARCH/APRIL 1984 7 7 MARCH/APRIL 1984than headaches about their ever-increasing Third World portfolios...

...Supermarkets were looted in Rio and Sio Paulo, reflecting the growing problem of starvation and malnutrition in urban Brazil...

...The opposition is too broad and well organized to be silenced by the repressive measures applied by other authoritarian regimes in similar predicaments...

...4.5 billion is to be provided by the IMF, conditional upon a mutually agreeable letter of intent and drastic austerity measures...

...In presenting the plan, the PMDB spokesman told Congress: "It is important to remember that the modest resources that this institution makes available to our country are directed to other institutions so that we are exchanging one creditor for another, in this case a more demanding one...

...The authorities assumed that, having "graduated" from the world of hunger, poverty and underdevelopment during the high-growth years of the 1960s and 1970s, Brazil would be spared the humiliation of being put under the tutelage of IMF "experts...

...After much discussion and controversy, the government's proposal was soundly defeated by Congress last October, demonstrating to the government the limits of its power...

...Langoni disagreed with two points in the agreement, the balanced budget and the commitment to reduce inflation to 55% by 1984...

...2.4 billion in short-term loans from the private banks, as nervousness about a possible default increased...

...As in Argentina and Chile, the situation seems to have gotten rapidly out of control for Brazil's generals...

...Banks simply withdraw support and wait out the agreement...

...The social misery is growing, placing Brazil among the world's most explosive countries...

...Ferrovia do Aco, a railroad through the steel-producing region...

...But according to popular wisdom, the dismissal was primarily the result of a personality clash, rather than an REPORT ON THE AMERICAS 6ideological dispute...

...Name calling aside, the proposal cannot be so easily dismissed...

...The government might try to control social unrest by violent means...

...The sole justification of these steps is that the loss will be overcompensated by new foreign investments...

...The government hopes to attract $1.5 billion in new foreign investments and has introduced several measures to that end...

...It was the government's fourth attempt to gain political backing for its IMF promise...

...According to the agreement, the government promised the IMF to further reduce wages by modifying the wage law that guarantees inflationadjusted pay--no trifle in a country where official inflation figures run over 150% annually...

...Already, a position paper distributed by the Rio branch of the government party warned that the actions of "hungry masses" might lead to a "restoration of authoritarianism...

...He concluded that the measures-reducing imports by 7% in real terms, cutting the budgets of state enterprises and raising further the prices of public services-will all serve to increase inflation rather than reduce it...

...Langoni, a Chicago-educated monetarist and former professor, was fired after calling the September IMF agreement "excessive and associated with too high social costs...

...150,000 people gathered on January 25 in Sio Paulo to demand an end to 20 years of military rule...

...Hoping to counteract mistrust, the government published the IMF agreement in several Brazilian newspapers...

...government announced the same day the agreement was signed that it intends to impose high penalty duties on Brazilian steel shipped to the United States, a measure sure to mean a loss of U.S...

...We do not repudiate the debt . . we owe . . we do not deny that . . but we will pay when we can and how much we can--preserving the standard of living and the national interest...

...1.23 billion was made available by the U.S...

...Planned investments in the steel industry have been reduced by 47% and investments in hydroelectric power scaled down...

...and nuclear reactors purchased from West Germany...

...But Brazil's foreign exchange needs far surpass the IMF's means...

...It included: * $4.4 billion in new loans...

...On the Brink of Default In the meantime Brazil is desperately trying to make ends meet in order to avoid the excessive arrears in debt service payments which would trigger a default...

...In other Third World countries, the rule of an iron fist is often viewed favorably by the IMF if it 8 REPORT ON THE AMERICAS helps implement the austerity program, and is not infrequently rewarded in hard currency...

...The problem is 'pauperization,' the phenomenon of people slipping down the economic ladder...

...The four-part packagesaid to be the largest syndicated loan to a government-also includes the rescheduling of about $5 billion of loans due this year, the maintenance of $10.3 billion of short-term trade financing and $6 billion of interbank credit lines...

...In the meantime it has become clear that this declaration amounts Claudia Dziobek is an economist specializing in Third World debt...

...Folha de Sdo Paulo also published an analysis of the agreement by Luiz Gonzaga de Mello Belluzzo, an economics professor at the University of Campinas...

...Brazilian officials were looking for a deal permitting them to increase borrowing from abroad by 8% in 1983 and 7% in 1984, reducing the debt over a long period of time...

...And, in the middle of a world recession Claudio Edinger/Kay Heese Former central banker, Carlos Langoni...

...300 million was added by the Treasury Fund a month later...

...Such measures reveal the government's degree of desperation...

...If this new money is to cover 1984 foreign exchange needs, Brazil must meet stringent goals, including a $9 billion trade surplus...

...1983--a year of austerity-opened with a 30% devaluation in addition to the monthly adjustments of the cruzeiro's exchange value, making imports of wheat-an important ingredient in the low-income diet-more expensive...

...Brazil's advisory committee, which includes only the major lending institutions, managed to put together a $6.5 billion new loan, repayable over nine years with a five-year grace period during which only interest payments would be made...

...With the fastest growing population in the world, such measures are clearly not viable for Brazil...

...For Brazil, that depression has brought the country to the political and social boiling point...

...The official rate of unemployment is 20%, but everyone knows that this figure is not much more than cosmetics...

...Disbursement of this loan was held up until September 1983...

...Delfim Netto's strategy is a risky one...

...rescheduling of $4.7 billion which was the equivalent of debt service payments for 1983...

...Admitting that IMF talks are underway is tantamount to announcing you have the bubonic plague, according to Delfim's logic...

...But neither has he won the friendship of the bankers, who simply see every new austerity measure as an indication that the bottom has not yet been reached...

...MARCH/APRIL 1984 projects...

...Flush with funds, Brazil built major hydroelectric facilities such as Itaipu on the Paraguayan border and Tucurui in the Amazon...

...Perhaps as an omen of difficulties to come, the U.S...

...The banks remain adamant that no loans will be forgiven...

...Suppose . . . that six months ago I had said: 'We will go to the IMF.' The next day I would have had to suspend the foreign exchange market and [be inU ueatmar Brazil's financial wizards are flanked by commercial bankers at the January signing of the bail-out agreement in New York City...

...Subsidies on food, electricity, water and gas were drastically curtailed in June...

...In the summer of 1983, 50,000 government workers organized a protest march in Rio...

...1983 Agreement: 15% GDP Drop A new letter of intent was finally signed in September 1983, more than a year after the secret negotiations were started and broken off because Brazil did not satisfy IMF demands...

...Leaders of the PMDB, the major opposition party, called for an end to recessionary policies, a rise in real wages, fiscal reform and, the "elimination of tutelage" (by the IMF) as a precondition for reorganizing the foreign debt and its service payments...

...Avoiding default will require compromises by the banks in the long run, but the latest round of rescheduling completed in October 1983 shows that only a small advance has been made in that direction...

...Having agreed to service the existing debt on time, Brazil has few alternatives but to sink deeper into the mud of obligations...

...A 5% per month inflation ceiling, to be further reduced to 2.4% in 1984, can only be implemented if real wages are cut drastically...

...Brazil makes sacrifices to entice new investors, while multinationals need not commit themselves to anything...

...Compromise legislation was passed in November, pegging cost of living adjustments at 87% of the inflation rate...

...Short of a comprehensive rescheduling, banks, governments and international financial institutions came up with last minute bridge support loans at the close of 1982: * $600 million was granted by Western bankers as an emergency measure in November...

...The GDP must increase by at least 6% annually just to create enough jobs to keep the rate of unemployment at its current level...

...Ironically, the monetarist has left, while Delfim, former professor of Keynesian economics at the University of Sdo Paulo, remains in office, defending the extreme version of monetarism advocated by the IMF...

...The bridge loan, no gift to be sure, is at competitive rates for less than three months and intended as intermediary financing until the IMF loan comes through...

...steelmills...

...Supplemental income taxes on profits sent abroad were eliminated...

...Foreign investors and bankers were fascinated by the government's mineral development program, Carajas, designed to develop vast regions of the northeast...

...Fights Among Private Banks This piecemeal approach was precisely what Delfim Netto had hoped to avoid...

...Half the ministers want Delfim sacked, the others want him killed," one top Delfim aide told an interviewer, confirming Delfim's self-assessment...

...to so much talk...

...Brazil's military regime-dating from a 1964 coup-had prided itself in producing the "Brazilian miracle" which attracted over $90 billion in credits from private Western banks...

...Reluctant to lend Brazil money for any length of time, banks are forced to grant shortterm loans to cover interest on the outstanding debt, with few prospects of greater solvency when these new shortterm loans fall due...

...Appealing to Brazil's political sovereignty and national pride, the party's proposal requests immediate suspension of debt-service and principal payments for at least three years and an agreement with creditors to repay the debt according to the country's capacity to produce an export surplus...

...Meanwhile the Bank of International Settlements (BIS) chipped in $1.2 billion in January 1983 for three months to be repaid with IMF money...

...The cuts in wages and reduction of investments in the state sector, according to Belluzzo, will worsen the current recession...

...This line of reasoning, however, assumed that Brazilian negotiators were free to sign whatever agreement they saw fit...

...Treasury Exchange Stabilization Fund, a reserve used to provide countries with short-term financial aid to prevent instability in currency markets...

...750 Petrobras workers, in Paulina, walked off their jobs last July for the first time in 20 years in protest of the government austerity plan...

...While the larger banks were, in principle, ready to go along with this IMF-sanctioned plan, many smaller banks, whose participation is vital, chose to drag out the discussions...

...It thus increased pressure to complete the IMF talks...

...The opposition controls a majority in the Chamber of Deputies and 24 seats out of the 69member Senate...

...In 1982, as the balance of payments was worsening and foreign exchange reserves necessary for servicing the external debt were rapidly shrinking, the government insisted that its problems were in no way comparable to those of other Third World countries, citing Mexico as a tragic case of incompetence...

...Poverty alone does not explain the explosive nature of the crisis," suggests Ant6nio Rangel, a political scientist who edits an opposition magazine, "because poverty has always been serious here...

...that was us," declared Brazil's Planning Minister Ant6nio Delfim Netto in a January 1983 speech attempting to justify the secret negotiations that had been conducted with IMF officials since mid-1982...

...Belluzzo serves as economic consultant to the Gazetta Mercantil Forum, an elite business group which has condemned the agreement...

...The 76 companionsall heavily indebted countries-are still together, traveling into the abyss of a depression that far surpasses that of the 1930s...

...A summer of labor unrest, violence and looting was followed by the biggest demonstration in Brazil's history...

...Government recessionary policies have been condemned by Brazil's unionized workers in marches, strikes and walk-outs...

...In August more than 2,000 hungry drought victims raided food warehouses, carrying off 59 tons of provisions in the northeastern town of Senador Pompeu, one of several cities where similar acts of spontaneous "self-help" took place...

...The IMF will supervise Brazil's progress on a monthly basis rather than the usual quarterly checkups...

...a roll-over of short-term trade credits totaling $9 billion...

...The economic trio-now completed by central bank President Affonso Celso Pastore-frantically travels throughout the world, hoping to drum up a few million dollars at each stop in order to meet the payments at the end of each quarter...

...In an effort to reduce government spending, construction on Iguape I and II nuclear reactors has been stopped indefinitely...

...A four-point proposal had been worked out and sent to the creditor banks...

...Moreover, Brazilian officials went out of their way to stress their efficiency and competence in carrying out these Finance Minister Ernane Galveas...

...And that was no longer the case...

...Moratorium Demanded Evidently the "economic trio"-Delfim, Langoni and Galvras-had not yet adjusted to Brazil's new political reality...

...Yet harsh words do not seem to weaken his determination to lead Brazil through these years of severe economic and social crisis...

...Rising tensions among the three main negotiators-particularly between Delfim and Langoni, director of the central bank-were eased by Langoni's dismissal in September 1983...

...Getting the close to 800 creditor banks to agree to this scheme proved to be a difficult enterprise...

...By doing the bidding of Brazil's creditors, he has made himself a chief target of the domestic opposition...

...huge aluminum plants...

...Some restrictions on remittances of royalties and technical assistance payments were lifted, making it easier for foreigners to take profits earned in Brazil out of the country...

...Repression Won't Pay Debt Two scenarios are likely, though unfortunately not mutually exclusive...

...After considerable last minute scurrying to secure the necessary commitments, the agreement was finally signed on January 27 in New York City...

...fact forced to] go to the IMF...

...The sum was to be repaid in 60-90 days...

...Secret negotiations prevent the "limbo" felt by most borrowing countries, producing interruptions in trade flows and thus shortages in food, intermediate goods, spare parts...

...The PMDB plan was based on the work of Celso Furtado, a leftist development economist who was allowed to return to Brazil after years in exile...

...The PDS, Brazil's government party, denounced the proposal as "passionate . . . and politically underdeveloped," calling the opposition a bunch of nationalistic student types...

...When the government finally owned up after the November 1982 elections, news of the secret accord with the IMF met with violent protest throughout the country, fueling popular discontent...

...Since the November 1982 elections, Congress has included a sizeable opposition...

...Repression, however, will not pay Brazil's debt...

...Also, a growing number of the non-unionized "poorest of the poor" are getting together to demonstrate their growing anger and desperation...

...A gathering of the unemployed turned into a march on the government palace, and sparked days of rioting when the newly elected opposition governor, Franco Montoro, refused to receive spokespeople...

...Secret Talks with the IMF It was this image that was at stake when Brazil ran out of foreign exchange in the fall of 1982...

...All are directly detrimental to the balance of payments, allowing multinational corporations to use up scarce foreign currency for their own purposes...

...It is a one-sided offer...

...With presidential elections scheduled for January 1985, the generals may well be biding time, hoping to put off the thorough rescheduling that is bound to come until mid-1985 or 1986...

...Authoritarian repression, while it may keep the government in power, will not solve Brazil's fiscal and social problems...

...The incident served to consolidate power with Delfim Netto, making him chief manager of Brazil's economic fate in the foreseeable future and thereby-as he himself put it in an interview last fall-the "most hated man in Brazil...

...Calculations by Edmar Bacha, a well-known Brazilian economist who will be a guest professor at Columbia University this spring, revealed that compliance with the IMF request to balance the budget would lead to a reduction of the gross domestic product by 15...

...Delfim Netto, Carlos Geraldo Langoni, head of the central bank, and Finance Minister Ernane Galv6as decided to begin secret negotiations with the IMF, because, as Delfim later explained, the calm surface had to be maintained to keep credit lines with private banks open...

...The vote came after an all night debate in the Brazilian Congress...

...As a representative for Banco do Brasil once put it, "Brazil is a conscientious capital-importing country . . tapping the international markets in an organized manner, and has fully demonstrated its ability to manage its foreign accounts well and consistently...

...She is the author of 'Mexican Economy--Creative Financing to the Rescue" in the January/February 1983 issue of the Report...