BRAZILIAN DEBT Eleventh Hour Ball-Out

September 25, 2007

"We were 76 traveling companions and only one did not renegotiate; that was us," declared Brazil's Planning Minister Ant6nio Delfim Netto in a January 1983 speech attempting to jus- tify the secret negotiations that had been conducted with IMF officials since mid-1982. In the meantime it has be- come clear that this declaration amounts Claudia Dziobek is an economist spe- cializing in Third World debt. She is the author of 'Mexican Economy--Creative Financing to the Rescue" in the Janu- ary/February 1983 issue of the Report. to so much talk. The 76 companions- all heavily indebted countries-are still together, traveling into the abyss of a depression that far surpasses that of the 1930s. For Brazil, that depression has brought the country to the political and social boiling point. A summer of labor un- rest, violence and looting was followed by the biggest demonstration in Brazil's history. 150,000 people gathered on January 25 in Sio Paulo to demand an end to 20 years of military rule. As in Argentina and Chile, the situa- tion seems to have gotten rapidly out of control for Brazil's generals. In 1982, as the balance of payments was wor- sening and foreign exchange reserves necessary for servicing the external debt were rapidly shrinking, the gov- ernment insisted that its problems were in no way comparable to those of other Third World countries, citing Mexico as a tragic case of incompetence. The authorities assumed that, having "grad- uated" from the world of hunger, pov- erty and underdevelopment during the high-growth years of the 1960s and 1970s, Brazil would be spared the hu- miliation of being put under the tutelage of IMF "experts." Brazil's military regime-dating from a 1964 coup-had prided itself in pro- ducing the "Brazilian miracle" which attracted over $90 billion in credits from private Western banks. Flush with funds, Brazil built major hydro- electric facilities such as Itaipu on the Paraguayan border and Tucurui in the Amazon; steelmills; Ferrovia do Aco, a railroad through the steel-producing region; huge aluminum plants; and nu- clear reactors purchased from West Germany. Foreign investors and bank- ers were fascinated by the government's mineral development program, Cara- jas, designed to develop vast regions of the northeast. Moreover, Brazilian officials went out of their way to stress their efficien- cy and competence in carrying out these Finance Minister Ernane Galveas. MARCH/APRIL 1984 projects. As a representative for Banco do Brasil once put it, "Brazil is a con- scientious 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." 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. Delfim Netto, Car- los Geraldo Langoni, head of the cen- tral bank, and Finance Minister Ernane Galv6as decided to begin secret nego- tiations with the IMF, because, as Del- fim later explained, the calm surface had to be maintained to keep credit lines with private banks open. "Sup- pose . . . 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. fact forced to] go to the IMF." Admitting that IMF talks are under- way is tantamount to announcing you have the bubonic plague, according to Delfim's logic. Banks simply withdraw support and wait out the agreement. Secret negotiations prevent the "lim- bo" felt by most borrowing countries, producing interruptions in trade flows and thus shortages in food, intermedi- ate goods, spare parts. This line of rea- soning, however, assumed that Brazilian negotiators were free to sign whatever agreement they saw fit. 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 politi- cal reality. Since the November 1982 elections, Congress has included a sizeable opposition. The opposition controls a majority in the Chamber of Deputies and 24 seats out of the 69- member Senate. When the government finally owned up after the November 1982 elections, news of the secret ac- cord with the IMF met with violent protest throughout the country, fueling popular discontent. According to the agreement, the government promised the IMF to fur- ther reduce wages by modifying the wage law that guarantees inflation- adjusted pay--no trifle in a country where official inflation figures run over 150% annually. After much discussion and controversy, the government's proposal was soundly defeated by Con- gress last October, demonstrating to the government the limits of its power. Leaders of the PMDB, the major op- position party, called for an end to recessionary policies, a rise in real wages, fiscal reform and, the "elimi- nation of tutelage" (by the IMF) as a precondition for reorganizing the for- eign debt and its service payments. Compromise legislation was passed in November, pegging cost of living adjustments at 87% of the inflation rate. The vote came after an all night debate in the Brazilian Congress. It was the government's fourth attempt to gain political backing for its IMF promise. The PMDB plan was based on the work of Celso Furtado, a leftist de- velopment economist who was allowed to return to Brazil after years in exile. In presenting the plan, the PMDB spokesman told Congress: "It is im- portant to remember that the modest resources that this institution makes available to our country are directed to other institutions so that we are ex- changing one creditor for another, in this case a more demanding one." Appealing to Brazil's political sov- ereignty 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 accord- ing to the country's capacity to produce an export surplus. "We do not repu- diate the debt . . we owe . . we do not deny that . . but we will pay when we can and how much we can--pre- serving the standard of living and the national interest." The PDS, Brazil's government party, denounced the proposal as "passionate . . . and politically underdeveloped," calling the opposition a bunch of na- tionalistic student types. Name calling aside, the proposal cannot be so easily dismissed. The opposition is too broad and well organized to be silenced by the repressive measures applied by other authoritarian regimes in similar predicaments. Economic Trio to Economic Duo The government's first reaction to the popular outburst of fury was to consolidate power within its own ranks. Rising tensions among the three main negotiators-particularly between Del- fim and Langoni, director of the central bank-were eased by Langoni's dis- missal in September 1983. Langoni, a Chicago-educated monetarist and former professor, was fired after calling the September IMF agreement "excessive and associated with too high social costs." Langoni disagreed with two points in the agreement, the balanced budget and the commitment to reduce inflation to 55% by 1984. But according to popular wisdom, the dismissal was primarily the result of a personality clash, rather than an REPORT ON THE AMERICAS 6ideological dispute. Ironically, the monetarist has left, while Delfim, for- mer professor of Keynesian economics at the University of Sdo Paulo, remains in office, defending the extreme ver- sion of monetarism advocated by the IMF. The incident served to consoli- date power with Delfim Netto, making him chief manager of Brazil's economic fate in the foreseeable future and there- by-as he himself put it in an interview last fall-the "most hated man in Brazil." "Half the ministers want Delfim sacked, the others want him killed," one top Delfim aide told an interview- er, confirming Delfim's self-assess- ment. Yet harsh words do not seem to weaken his determination to lead Brazil through these years of severe economic and social crisis. 1983--a year of austerity-opened with a 30% devalu- ation in addition to the monthly adjust- ments of the cruzeiro's exchange value, making imports of wheat-an impor- tant ingredient in the low-income diet-- more expensive. Subsidies on food, electricity, water and gas were drasti- cally curtailed in June. In an effort to reduce government spending, construction on Iguape I and II nuclear reactors has been stopped indefinitely. Planned investments in the steel industry have been reduced by 47% and investments in hydroelectric power scaled down. The government hopes to attract $1.5 billion in new foreign investments and has introduced several measures to that end. Some restrictions on remit- tances of royalties and technical assis- tance payments were lifted, making it easier for foreigners to take profits earned in Brazil out of the country. Supplemental income taxes on profits sent abroad were eliminated. Such measures reveal the govern- ment's degree of desperation. All are directly detrimental to the balance of payments, allowing multinational cor- porations to use up scarce foreign cur- rency for their own purposes. The sole justification of these steps is that the loss will be overcompensated by new foreign investments. It is a one-sided offer; Brazil makes sacrifices to entice new investors, while multinationals need not commit themselves to anything. And, in the middle of a world recession Claudio Edinger/Kay Heese Former central banker, Carlos Langoni. and a climate of social tension and po- litical turmoil, who is going to invest in Brazil? 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. 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. Reluctant to lend Brazil money for any length of time, banks are forced to grant short- term loans to cover interest on the out- standing debt, with few prospects of greater solvency when these new short- term loans fall due. Having agreed to service the existing debt on time, Brazil has few alterna- tives but to sink deeper into the mud of obligations. 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 West- ern bankers as an emergency measure in November. The sum was to be re- paid in 60-90 days. * $1.23 billion was made available by the U.S. Treasury Exchange Stabiliza- tion Fund, a reserve used to provide countries with short-term financial aid to prevent instability in currency mar- kets. The bridge loan, no gift to be sure, is at competitive rates for less than three months and intended as in- termediary financing until the IMF loan comes through. It thus increased pressure to complete the IMF talks. * $300 million was added by the Treasury Fund a month later. * $2.4 billion in short-term loans from the private banks, as nervousness about a possible default increased. * $4.5 billion is to be provided by the IMF, conditional upon a mutually agree- able letter of intent and drastic austerity measures. Disbursement of this loan was held up until September 1983. Meanwhile the Bank of International Settlements (BIS) chipped in $1.2 bil- lion in January 1983 for three months to be repaid with IMF money. Fights Among Private Banks This piecemeal approach was pre- cisely what Delfim Netto had hoped to avoid. 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. A four-point proposal had been worked out and sent to the creditor banks. It included: * $4.4 billion in new loans; * rescheduling of $4.7 billion which was the equivalent of debt service pay- ments for 1983; * a roll-over of short-term trade cred- its totaling $9 billion; * maintenance of short-term credit lines for Brazilian banks at the levels pre- vailing in mid-1982. Getting the close to 800 creditor banks to agree to this scheme proved to be a difficult enterprise. While the larger banks were, in principle, ready to go along with this IMF-sanctioned plan, many smaller banks, whose par- ticipation is vital, chose to drag out the discussions. 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. Small banks also complain about the hierarchical struc- ture 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-increas- ing Third World portfolios. 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. Hoping to counteract mistrust, the government published the IMF agree- ment in several Brazilian newspapers. Folha de Sdo Paulo also published an analysis of the agreement by Luiz Gonzaga de Mello Belluzzo, an eco- nomics professor at the University of Campinas. Belluzzo serves as economic consultant to the Gazetta Mercantil Forum, an elite business group which has condemned the agreement. 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 in- flation rather than reduce it. A 5% per month inflation ceiling, to be further reduced to 2.4% in 1984, can only be implemented if real wages are cut dras- tically. The cuts in wages and reduc- tion of investments in the state sector, according to Belluzzo, will worsen the current recession. The IMF will super- vise Brazil's progress on a monthly basis rather than the usual quarterly checkups. 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 re- duction of the gross domestic product by 15%. With the fastest growing pop- ulation in the world, such measures are clearly not viable for Brazil. The GDP must increase by at least 6% annually just to create enough jobs to keep the rate of unemployment at its current level. As Bacha put it, "Even if the government wanted to, the country re- fuses 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 Gas- parian, international secretary of the opposition PMDB. The official rate of unemployment is 20%, but everyone knows that this figure is not much more than cosmetics. Government recession- ary policies have been condemned by Brazil's unionized workers in marches, strikes and walk-outs. In the summer of 1983, 50,000 gov- ernment workers organized a protest march in Rio. 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. Also, a growing number of the non-unionized "poorest of the poor" are getting together to demonstrate their growing anger and desperation. Three days of extremely violent rioting shook Sdo Paulo last April. A gathering of the unemployed turned into a march on the government palace, and sparked days of rioting when the newly elected op- position governor, Franco Montoro, refused to receive spokespeople. Supermarkets were looted in Rio and Sio Paulo, reflecting the growing problem of starvation and malnutrition in urban Brazil. 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 spontane- ous "self-help" took place. The social misery is growing, plac- ing Brazil among the world's most ex- plosive countries. "Poverty alone does not explain the explosive nature of the crisis," suggests Ant6nio Rangel, a political scientist who edits an opposi- tion magazine, "because poverty has always been serious here. The problem is 'pauperization,' the phenomenon of people slipping down the economic ladder. " Repression Won't Pay Debt Two scenarios are likely, though un- fortunately not mutually exclusive. The government might try to control social unrest by violent means. 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 authori- tarianism." Repression, however, will not pay Brazil's debt. 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. But Brazil's foreign ex- change needs far surpass the IMF's means. Authoritarian repression, while it may keep the government in power, will not solve Brazil's fiscal and social problems. 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. Avoiding default will require com- promises 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. The banks remain ada- mant that no loans will be forgiven. Brazil's advisory committee, which includes only the major lending institu- tions, managed to put together a $6.5 billion new loan, repayable over nine years with a five-year grace period dur- ing which only interest payments would be made. This new money will allow Brazil to pay off arrears totaling about $1.7 billion. The four-part package- said to be the largest syndicated loan to a government-also includes the re- scheduling 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. After considerable last minute scurry- ing to secure the necessary commit- ments, the agreement was finally signed on January 27 in New York City. Delfim Netto's strategy is a risky one. By doing the bidding of Brazil's creditors, he has made himself a chief target of the domestic opposition. 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. If this new money is to cover 1984 foreign exchange needs, Brazil must meet stringent goals, including a $9 billion trade surplus. Perhaps as an omen of difficulties to come, the U.S. government announced the same day the agreement was signed that it intends to impose high penalty duties on Brazil- ian steel shipped to the United States, a measure sure to mean a loss of U.S. customers and a resulting drop in foreign exchange earnings.

Tags: Brazil, debt, IMF, banking, economy

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