<nettime> Brazil: financial crisis

[Michel Chossudovsky <chossudovsky@sprint.ca>]

        THE BRAZILIAN FINANCIAL SCAM
        By Michel Chossudovsky

Professor of Economics, University of Ottawa, author of <italic>The
Globalisation of Poverty, Impacts of IMF and World Bank Reforms</italic>,
Third World Network, Penang and Zed Books, London, 1997. (The book can be
ordered from twn@igc.org)

Copyright by Michel Chossudovsky Ottawa 1998. All rights reserved. This
text can be posted and/or forwarded. To publish or reproduce in printed
form, contact the author at fax: 1-514-4256224, E-mail:
chossudovsky@sprint.ca

-----

In Brazil, a multi-billion dollar financial scam is in the making. The IMF
sponsored operation is a "re-run" of last year's speculative raids on
Southeast Asia which led to the confiscation of more than 100 billion
dollars of hard currency reserves. On Friday September 11th amidst turmoil
on the Sao Paulo stock exchange, some 1.7 billion dollars had quietly left
the country in a single day. In October, the pace of capital flight
(funneled through the forex market) was running at the pace of 400 million
dollars a day... 

The vaults of the Central Bank of Brazil were being ransacked by
"institutional speculators" with the tacit collusion of the government of
President Fernando Henrique Cardoso. The Brazilian authorities stood idle:
on instructions from their Wall street masters, no exchange controls were
to be instituted to mitigate the outflow of money wealth. In the words of
Brazil's Finance Minister Pedro Malan, restrictions on capital movements
are counterproductive and would be conducive "<italic>to all sorts of
corrupt practices</italic>". (Jornal do Brasil, 5 October 1998). Instead,
short-term interest rates had been artificially boosted to 50 percent with
a view to upholding Brazil's ailing currency. (The exchange rate under the
real-dollar peg varies between an upper and lower level). According to J.
P. Morgan in Sao Paulo, the cost of the interest rate hike to the country
(in terms of added debt servicing obligations) is a staggering 5 billion
dollars a month. (Financial Times, 18 September 1998). It was a massive
sell-out: rather than curbing the flight of capital, the structure of high
interest rates had contributed to heightening the debt burden, not to
mention the devastating impact of the credit squeeze on domestic
producers.  The country is facing imminent bankruptcy; the State apparatus
is under the control of Brasilia's external creditors. Moreover, Brazil's
internal debt had almost doubled in less than six months increasing from
$145 billion in January to $254 billion in July (of which $45 billion are
due in October)... 

Wall Street calls the Shots

The same Wall Street money-managers who decide Brazil's macro-economic
agenda are major speculative actors well versed in the art of market
manipulation. Its a modern form of highway robbery: since July 1998, 30
billion dollars have been taken out of Brazil. The loot has been
transferred into the private coffers of Western banks and into the
overseas dollar accounts of Brazil's financial elites. 

This confiscation of the nation's hard currency reserves is the result of
political manipulation. The speculators knew that the currency would be
devalued after the October presidential elections. They had already
converted their Brazilian reales into dollars using the forward foreign
exchange market. The conditions enabling the outflow of the country's hard
currency reserves had been carefully worked out by the IMF and the
government of Fernando Henrique Cardoso in consultation with the world's
largest commercial banks and brokerage houses. The central bank was to
uphold the Brazilian real by massively selling dollars in the forex
market. In other words, central bank reserves have been looted. The
reserves are being privatised... 

Demise of the Central Bank

This process marks the demise of Brazil's central bank. Brazil's foreign
currency reserves have fallen from $78 billion in July 1998 to $48 billion
in September. And now the IMF has offered to "<italic>lend the money
back</italic>" to Brazil in the context of a "Korean style" rescue
operation which will eventually require the issuing of large amounts of
public debt in G-7 countries. The Brazilian authorities have insisted that
the country "is not at risk" and what they are seeking is
"<italic>precautionary funding</italic>" (rather than a "bail-out") to
stave of the "contagious effects"of the Asian crisis.  Ironically, the
amount considered by the IMF (30 billion dollars) is exactly equal to the
money "taken out" of the country (during a 3 month period) in the form of
capital flight.(See Peter Muello, "IMF Support Lifts Brazil Economy",
Associated Press, 9 October 1998).  But the central bank will not be able
to use the IMF loan to replenish its hard currency reserves. The bail-out
money (including a large part of the $18 billion US contribution to the
IMF approved by Congress in October) is intended to enable Brazil to meet
current debt servicing obligations, --ie. to reimburse the speculators. 
The bailout money will never enter Brazil. 

Behind the Scenes Negotiations

The Southeast Asian bailouts constitute a "dress rehearsal" for similar
multi-billion schemes to be adopted in Latin America's largest economies.
During the annual meetings of the IMF and the World Bank in October,
behind the scenes discussions were held between Brazil's Minister of
Finance Pedro Malan and William Rhodes, Vice-President of Citibank
representing Brazil's external creditors. Ironically, these negotiations
were being held at a time when G-7 leaders, anxious to appease public
opinion, had called for controls on short-term capital movements. As
ministers of finance were meeting behind closed doors, the representatives
of some 300 global banks had gathered in parallel sessions under the
auspices of their Washington think tank, the Institute of International
Finance. The global banks were inviting the IMF "to sharpen [rather than
soften] its techniques of surveillance" as well as strengthen its
collaboration with the private financial sector. (See Dr. George Blum,
Chairman of IIF, Opening Statement, Press Conference, Institute of
international finance, Washington, 3 October 1998). 

President Fernando Henrique Cardoso had already signed a "Letter of
Intent" which commits the Brazilian authorities to massive austerity
measures. The latter will require substantial lay-offs of federal
government employees as well as a curb on transfer payments to the state
governments. In the words of Demosthenes Madureira de Pinho Neto, the
Central Bank's director of foreign operations: "<italic>the budget
adjustment will be dramatic, definitive and permanent"</italic>. To
"restore business confidence" (according to a representative of Goldman
Sachs), Brazil must implement "<italic>an overshoot on fiscal
adjustment</italic>" (well beyond the austerity package imposed by the New
York banking committee in 1994 under the Real Plan).  The "economic
therapy" required to restore "the faith and trust" of foreign investors
will result in further bank failures and mass unemployment. 

Under the Presidency of Fernando Henrique Cardoso, the creditors are in
control of the State bureaucracy, of its politicians. The State is
bankrupt and its assets are being impounded under the privatisation
programme... The Real Plan initiated in 1994 --with the blessing of
Brazil's Wall Street creditors has reached a dangerous turning point. A
new lethal phase of economic and social destruction has commenced: to
ensure the swift payment of debt servicing obligations, the IMF will
require cuts in the budget deficit of the order of 20 billion dollars (ie.
3 percent of GDP) to be implemented in the immediate aftermath of the
elections. 

Large portions of the national economy will be put on the auction block.
The privatisation programme (envisaged under the Real Plan) will be
speeded up: public utilities including State telecom and electricity
companies are to be sold off at bargain prices to foreign capital. The
federal government has also envisaged legislation which will allow for the
privatisation of municipal water and sewerage. However, the modest
proceeds of these sales will only enable Brazil to meet a fraction of its
debt servicing obligations. 

Renewed Inflation

Currency devaluations in the aftermath of the elections will trigger an
inflationary spiral leading to a further collapse in the standard of
living. Substantial increases in sales taxes required under the bailout
will also contribute to compressing real purchasing power. The proposed
hikes in State revenues (to be raised largely from higher levels of
taxation and the proceeds of the privatisation programme) are of the order
of R10 billion ($8 billion). 

Impoverishment and Social Devastation

In a country where more than half the population is already below the
poverty line, the impacts of an the IMF bail-out will be devastating.
Large sectors of Brazil's population of 160 million people will be driven
into abysmal poverty. Entire regions of the country will be pushed into
recession. The central government will be weakened: with the impending
fracture of the federal fiscal structure, State governments will be left
to their own devices. The country's regions will become increasingly
balkanised; as in Indonesia and Korea, Wall Street investment houses will
be invited to "pick up the pieces". 

The Global Economic Crisis at a Dangerous Cross-Roads

The social impact in Latin America (where the IMF sponsored strucutral
adjustment programme has been routinely applied for more than ten years)
is likely to be far more destructive than in Southeast Asia. While G-7
leaders have formally acknowledged some of the shortcomings of the IMF's
interventions, the application of "strong economic medicine" is still part
and parcel of the Latin American agenda. In recent months, currency
devaluations have swept the continent. In Mexico, exacerbated by high
interest rates, the internal debt has spiralled. In Peru, a general strike
in October --in protest against the IMF sponsored reforms of President
Alberto Fujimori-- was brutally repressed by units of Army. In Argentina,
the central bank already operates as a de facto "currency board" under the
guidance of its external creditors. In a new wave of IMF sponsored
privatisations, Argentina's largest commercial banks are being liquidated
and sold off to foreign investors at bargain prices... 

The global crisis has reached a dangerous cross-roads as speculators and
creditors extend their grip into Latin America: the IMF sponsored
financial scam (implemented in Russia and Southeast Asia) is  to be
inflicted on Latin America's largest economies:  Brazil, Mexico,
Argentina and Venezuela. Washington's "hidden agenda" is to take over
productive assets and recolonise the continent.

http://www.interlog.com/~cjazz/chossd.htm

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