[ing] 1/2 Krugman Vs. Soros ---ooops, Fraga affair

R. Magellan magellan at netrio.com.br
Thu Feb 18 20:42:54 PST 1999


"So are they all, all honourable men. (....) I will not do them wrong; I rather choose to wrong the dead, to wrong myself and you, than I will wrong such honourable men." (W.S., Julius Caesar, sc. II)

The next time that Paul Krugman (MIT) writes either about Brazil or about inside information he should begin with this Shakesperean text, as you are going to see why. I refer to his article "Don't Blame It on Rio ... or Brasilia Either -- The real is caught in a confidence trap", that was posted on the electronic edition of Slate magazine on Thursday, Feb. 11, 1999. It is transcribed in the second part of this message.

"Blame It on Rio" is the name of a movie (a comedy of manners) about a quite square U.S. young lady that earns a trip to Rio de Janeiro and will not be the same person as before (in the progressive sense), for the dispair of her parents. How to link this to an ailing currency, the Brazilian real?

A case of inside information? ************************************ The article was originally adorned by a small sidebar about whether Quantum Emerging Growth Fund (a Soros's one) had had inside information before the appointment of Arminio Fraga (the Soros's main officer in Brazil) to head BCB -- the Brazilian Central Bank, the highest monetary authority, after the dismissals of G.Franco and F.Lopes (see my message dated February 2nd, the day of this latter's dismissal).

Krugman says in his defence that "I had been told by several investment industry sources that Quantum Fund had bought heavily just before the appointment of Fraga" but also that "it still seems to me incredible that nobody else in the media drew the connection between Quantum's market actions and the timing of the appointment." Rumors about the action of insiders in the capital and financial markets were then very high in Brazil too, but not restricted to the Soros's businesses alone.

It seems that the Soros's team ---- ooops, Fraga's team or perhaps the Brazilian diplomacy acted very fast to put Krugman against the wall, since the MIT economist felt himself obliged to add three consecutive disclaimers on Fraga's honesty to his post (see them also in the second part of this message).

Nevertheless, it becomes a ludicrous series, as you all are going to see: each time that Krugman tries to explain things and to apologize he makes the suspicions grow higher about Fraga's role as a provider of insider trading information on currency and debts to his former boss (oh, did I say __former__?). The latest explanation, probably for practical reasons, is framed as if it were an affidavit to be solemnly read before a court ! What next ?

With friends like these, who needs foes? ************************************************ This incident with Krugman is a very mild one as compared to the __hot__ reception that Fraga is having in his own country, being back after a very extended permanence in New York. Just to remember, Arminio Fraga, aged only 41, is a Ph. D. graduate of Princeton University and has been a manager of Quantum since 1993, having worked before it as a professor at the renowned Getulio Vargas Foundation, the leading private institution for economic studies in Brazil.

As I said, Brazil was stupified at hearing the incredible news about the replacement of former BCB governor "Chico" Lopes so soon after his appointment and amidst the height of a financial crisis and having an out of schedule IMF -- International Monetary Fund mission visiting Brazil. Furthermore, the crown prince himself, Stanley Fischer (the first deputy managing director of the IMF) had unexpectedly left the Davos meeting to rush to Brasilia just after the Brazilian Black Friday (January, 29). That move came shortly after Fischer arrived.

"The newly-appointed BCB president" ---Arminio Fraga, the Soros man--- "drew praise from investors, who said he would bring to the job practical experience and knowledge of how international investors operate" as the NYT then informed. To the general public, however, the first moment was one of astonishment, under the clear impression that a high finance Blitzkrieg was (and IS !) taking Brazil over.

To add insult to injury, Stanley Fischer took part in an interview with TVs and newspapers alongside Brazilian officials as if he were one of the boys. With no diplomatic training, at a certain point Fischer straightly declared to the press conference: "I support Fraga !" This answer soon produced a generalized laugh in the audience when translated quite literally by an unable IMF officer as "Suporto Fraga!" ("suporto" means "I tolerate Fraga";

the translator should have said "Apóio Fraga !").

Nevertheless, since there is a possible sound business reason for the move, the members of the federal parliament who side with the neoliberal government of President Fernando Henrique Cardoso took that praise about Fraga at their own practical way, which is not praiseworthy at all !

A powerful and vocal Senator, for instance, had just strongly regretted the day before the Fraga nomination that there is not in Brazil the death penalty, that could otherwise be applied to the financial speculators which had spread chaos all over the country in that "Black Friday". When asked by the press if it would be the case of applying it to a mega-speculator agent as Fraga, the Senator bluntly answered: "Well, you know, some bandits are now at our side!" Similar odd rationales have been repeated by other congresspeople, as "he is a very experienced guy, he knows quite well all those financial gangsters' dirty tricks".

Needless to say that the official justification for hiring a Soros agent backired and drew mockery everywhere. For instance, in a morning radio program that is very popular among cab drivers of Rio de Janeiro the showman suggested: why not to hire a drug dealer to head the Federal Police? Or what about nominating the biggest tax dodger of the country to be the new director of the Federal Revenue Services? After all, they are supposed to know everything about their activities! (these talkative cab drivers are one of the most effective instruments to spread rumors and informal propaganda).

Next week Fraga will be subject to a mandatory examination in the Federal Senate in order to have his nomination validated. It will not be easy at all. Senator Eduardo Suplicy (PT -- the Workers Party), for instance, who also holds a Ph. D. in economics and who is a very active congressperson, has been gathering information and evidence from independent sources. He is very suspicious too about Fraga's insider role, so regarding Krugman's initial words not to be a fancy supposition.

Brief comments on Krugman's article ********************************************* To say that "the economic history of Brazil is one of punctured enthusiasms--of brief episodes of hope followed by bitter disappointment" is quite odd for an economist to tell, not to mention that it is bizarre.

The following paragraph ignores that Brazil is under continuous SAPs (structural adjustment programs) since 1978, which in themselves show that we have entered into a new stage of capitalism, that of the permanent and irreversible crisis. For her unique features of being at the same time the 8th or 9th GNP in the world and a peripheral economy, Brazil has been getting all the time the worst consequences of the crises in the improperly called "first" and "third" worlds (our partner in troubles, Argentina, could be added to this too). The paragraph reads:

"For the fact is that this time Brazil has tried very

hard to play by the rules. Five years ago it introduced a

new currency, the real, and promised to avoid the

inflationary excesses of the past. Thus far it has

delivered, with prices basically stable over the past

year. Like other Latin America countries, Brazil also

moved to free up its markets, privatizing inefficient

companies, eliminating import quotas, lowering tariffs,

and so on. While the process of reform has by no

means been completed, the progress is real and


The most part of the privatized companies were efficient ones, both as to the common economic meaning of efficiency as well as to the technological meaning. AFTER privatization some of them have soon begun to behave quite badly, as it is the case of the two electricity companies of Rio de Janeiro State, the subway company of the Rio de Janeiro city, several local telephonic companies. Furthermore, a good part of them were already quoted in the Brazilian stock exchanges since their foundation, what means that about half of their shares were in the hands of the general public, both in Brazil and abroad.

Krugman also says:

"But the main reason for

"contagion" from Russia to Brazil was psychological:

Seeing Russia default on its debt raised fears that

Brazil, which also has large budget deficits, might be

risky too. And so capital began fleeing the country."

Those large budget deficits in Brazil and the external debt as well have been sky-rocketing since the inception of the Real Plan in mid-1994. In 1998 the deficit amounted to 7.5% of the domestic product, being 7.0 of this 7.5 just to pay interest on federal debt. Krugman notes ahead two important features of the Brazilian federal deficit which are not commonly disclosed abroad and even internally:

"But there is something

a bit funny about Brazil's deficit, if you look at it at all

closely. You see, Brazil is actually running a substantial

"primary surplus"--that is, if you do not count the

interest on outstanding debt, tax receipts are larger than

spending. The primary surplus would be even larger

than it is if the economy were not depressed,

depressing tax receipts too."

"It turns out

that Brazil isn't particularly deep in debt, by the usual

measures. The government debt is less than half the

annual GDP, no worse than the ratio for the United

States and better than that of most European countries.

What makes Brazil's deficit so large is not the size of its

debt but the very high interest rates it must pay on that

debt--interest rates that are high because of a lack of

investor confidence. And why do investors lack

confidence? Because of those big deficits."

"A lack of investor confidence" seems to be another funny joke of the conservative economists' pidgin, one of these jokes that they use to deceive themselves and the poor mortals, like the fable of the rational consumer. It could be deemed so if it didn't represent in the concrete social life a lot of economic-related individual tragedies, including family breakdown and suicides of people who are burdened with family care. Investors don't put nor keep their money at all where their confidence really lacks!

So, the federal deficit becomes a perverse vicious circle: the more the stabilization policies rely on public debt in foreign currencies, the more the deficit raises because risk perception and interest grows higher; so, present monetary stabilization in the present certainly means a huge unstableness in the future.

The budgets of the federated States and Municipalities, although these are formally autonomous entities as in USA, get the "contagion" too and in a worse way, since they can't print money, and, as a general rule, they can't borrow nor raise their taxes without dealing complex arrangements among themselves and with the Federal Union. Very high interest rates also made a recession (depression !) inevitable, what causes defaults in the collection of taxes and so feeds back that perverse vicious circle. Soros knows quite well what he has been telling around all the time...

The collusion ----ooops, the conclusion *********************************************** These mad policies could only be followed by professional economists deeply committed to the financial capital, both domestic and foreign (Brazilian banks are very powerful and are used to pull dirty tricks). Even right wing politicians often mention derisorily the scandalous relationship between the high federal financial officers and the banking system as permanent promiscuity ("promiscuidade permanente").

Is this corruption? Not necessarily, for social technicians, as economists and lawyers, are too easily influenced since their college years by the ideological rationales that prevail in their professions. Hearts and minds, that is all, although promising well paid careers and stocks options sometimes helps a lot...

In solidarity, Roberto

Paix entre nous, guerre aux tyrans (....) Ouvriers, paysans, nous sommes Le grand PARTI DES TRAVAILLEURS. (L' Internationale)

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