Ever since the Argentine economy slid into crisis last year, there have been fears that the difficulties would ripple across the region. Uruguay’s recent troubles are proof that Latin American markets are so deeply intertwined that any national emergency poses a threat to its neighbors. The chief concern has always been Brazil, South America’s biggest economy. A crisis there would be a body blow to the entire regional economy — and since the start of the year, Brazil’s prospects have plunged. Fortunately, the International Monetary Fund stepped in last week with a $30 billion loan that could halt the slide. But the IMF package is only a safety net; Brazil must take charge of its sickening finances. Other concerned nations must help out as they can — and they can do more than they think.
The symptoms of Brazil’s illness are plain. Since January, the real, the country’s currency, has lost about 50 percent of its value — nearly one-third in the last month alone — and the economy has stopped in its tracks. Total debt has reached 60 percent of gross domestic product, a rise of 8 percentage points in a year. The slowdown in the international economy has increased investor reluctance to finance government borrowing. With about one-third of the public debt indexed to the dollar, the fall in the value of the real compounds the concern.
The irony is that Brazil has been relatively well behaved. Since 1999, when debt began to spiral out of control, the government has met IMF spending targets; it has a primary public sector surplus that exceeds 3.5 percent of GDP; there is a flexible exchange rate; and the central bank has an inflation-targeting policy. The big change, apart from the global slowdown, is the political outlook.
Brazil will hold presidential elections in October, and there are fears that the two opposition-party candidates — Mr. Luiz Inacio Lula da Silva and Mr. Ciro Gomes — will restructure the public debt if elected. Both men have said they will not do that, but the markets are skeptical — especially since the current IMF program, which has brought stability, expires Dec. 13. Then, all bets are off. While a multiyear IMF loan would provide the needed continuity, neither opposition candidate wants to give his opponent an easy advantage by endorsing such a measure. (It would lock him into fiscal austerity, leaving the other candidate free to play the populist anti-IMF card.)
The IMF has been unwilling to help Brazil without that pledge of allegiance. Last week’s crisis in Uruguay, which forced the government to close banks, obliged the institution to shove aside its concerns and offer Brazil a historic $30 billion loan. The agreement will give Brazil $6 billion this year and the remainder next year. The central bank will also be allowed to use an extra $10 billion of its reserves of dollars and other “hard” currencies to defend the real. The previous $15 billion IMF package required the central bank to maintain at least $15 billion in hard-currency reserves, which limited its ability to support the real in foreign exchange markets.
In exchange, Brazil must run a primary budget surplus of at least 3.75 percent of GDP. Significantly, all the candidates, including the opposition, have applauded the package. Delaying the bulk of the payout until next year — after the elections — is a good way of ensuring that the election winner, whoever that is, honors the agreement.
The bailout represents a significant reversal for the United States. The Bush administration was highly critical of the policies of its predecessor and vowed to make bankrupt governments face the discipline of the market. Earlier this summer, Treasury Secretary Paul O’Neill said he did not think bailouts were a good idea for Brazil because the country’s problems were political, not economic. Last month, he wondered aloud whether loans to Latin America would end up in Swiss banks, a remark that prompted diplomatic protests.
But in practice, the U.S., the chief voice for the IMF, has supported bailouts even since the new team took office. The latest move is more proof than rhetoric must give way to reality when the stakes are high. But if the Bush administration — and other concerned governments — want to help Brazil, there are other, equally important ways of helping.
The best method would be opening their markets to goods from developing countries. Exports of agricultural goods and steel, two of Brazil’s most competitive products, have been hurt by recent U.S. trade decisions. While the U.S. moves are the most egregious, Japan and the European Union have also hindered Brazil’s exports — as well as those of other developing countries. These policies are shortsighted. In fact, they are double losers: The developed world pays for protection now and for bailouts later. It is time for some common sense.
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