SECOND PART OF THREE
Date: Thu, 28 Jan 1999 From: Andreas Rockstein <anro0002 at stud.uni-sb.de> To: Andreas Rockstein <anro0002 at stud.uni-sb.de> Subject: [mai-dt.] BRAZIL'S IMF SPONSORED ECONOMIC DISASTER [I] (fwd)
---------- Forwarded message ---------- Date: Thu, 28 Jan 1999 10:52:17 -0300 From: ecoropa <ecoropa at magic.fr> Subject: BRAZIL'S IMF SPONSORED ECONOMIC DISASTER
Date: Wed, 27 Jan 1999 13:38:05 -0500 From: Michel Chossudovsky <chossudovsky at sprint.ca> Subject: BRAZIL'S IMF SPONSORED ECONOMIC DISASTER
BRAZIL'S IMF SPONSORED ECONOMIC DISASTER
by Michel Chossudovsky
Professor of Economics, University of Ottawa, author of The Globalisation of Poverty, Impacts of IMF and World Bank Reforms, Third World Network, Penang and Zed Books, London, 1997. (The book can be ordered from twn at apc.igc.org)
Copyright by Michel Chossudovsky Ottawa, January 1999. All rights reserved. To publish or reproduce in printed form, contact the author at chossudovsky at sprint.ca
This article follows an earlier article by the author (written before the crisis) entitled "the Brazilian Financial Scam", Third World Resurgence, November 1998;
The earlier article on Brazil is available at:
http://www.twnside.org.sg/souths/twn/title/scam-cn.htm)
The Speculative Onslaught: From East Asia and Russia to Latin America
As Wall Street speculators extend their deadly raids, the global financial crisis has reached a new climax. Succumbing to the speculative onslaught, the São Paulo stock exchange crumbled on Black Wednesday, 13 January 1998. The vaults of Brazil's central bank were burst wide open; the Real's "crawling" peg to the dollar was broken. Central Bank Governor Gustavo Franco was replaced by Professor Francisco Lopes who was immediately rushed off to Washington together with Finance Minister Pedro Malan for high level "consultations" with the IMF and the US Treasury.
Public opinion had been carefully misled; the "Asian flu" was said to be spreading... The global media had casually laid the blame on Minas Gerais' "rogue governor" Itamar Franco (a former President of Brazil) for declaring a moratorium on debt payments to the federal government.1 The threat of impending debt default by the State governments was said to have affected Brasilia's "economic credibility".
Brazil's National Congress was also blamed for asking deceptive questions and for not having granted in December a swift and "unconditional rubber-stamp" to the IMF's lethal economic medicine. The latter required budget cuts of the order of 28 billion dollars (including massive lay-offs of civil servants, the dismantling of social programmes, the sale of state assets, the freeze of transfer payments to the State governments and the channelling of State revenues towards debt servicing).
Shuttle Diplomacy
On the weekend of January 16-17th, Finance Minister Malan and Central Bank Governor Lopes were in Washington for high level talks, on Saturday at IMF Headquarters and on Sunday at the offices of the US Treasury. "Some officials in Washington were [at first] outraged by the lack of consultation by Brasilia over the original decision made late on Tuesday [the 12th] to abandon the Real peg given the time and effort put into the original [IMF sponsored] programme [negotiated in November 1998]".2
IMF Managing Director Michel Camdessus later admitted that "the decision was a wise move to stop the loss of reserves" while emphasising that he expected Brasilia to meet the fiscal targets under the Fund's financial package signed in November. The flexible exchange rate regime was also approved on condition the "extremely high" domestic interest rates remained in force and that no foreign exchange controls be introduced (which might prevent institutional investors from moving their money in and out of the country).
Squeezing Credit
In insisting on tight monetary policy, the Washington based institutions were also intent on destroying Brazil's industrial base, taking over the internal market and speeding up the privatisation programme. The government overnight benchmark interest rate was increased to a staggering 32.5 % (per annum) implying commercial bank lending rates between 48.7 % and 84.3 % per annum.3 Local manufacturing crippled by unsurmountable debts had been driven into bankruptcy. Purchasing power had crumbled; interests rates on consumer loans were as high as 150% to 250% leading to massive loan default...4
Endorsement by the Washington Consensus
Barely a few days after Black Wednesday, in a prepared press statement, IMF Managing Director Michel Camdessus welcomed "...the reaffirmation of fiscal consolidation as the foremost priority (...) together with the structural and privatisation measures which are part of the agreed program with the Fund".5 World Bank President James Wolfensohn and Vice President Joseph Stiglitz -- known for his recent critique of the IMF's high interest rate policy in East Asia-- also provided their firm backing: "We are pleased with Minister Malan's final account of his Washington meetings, and welcome his invitation to intensify our dialogue."6
Increase in the Price of Bread
On Monday morning January 18th, the Sao Paulo stock exchange had temporarily recovered, regaining some of its losses. While "confidence" had been reinstated, the Real had lost more than 20 percent of its value in less than week. By late January it had declined by more than 40 percent, leading to an almost immediate surge in the prices of fuel, food and consumer essentials. The price of bread increased immediately by ten percent. The demise of the nation's currency had contributed to compressing the standard of living in a country of 160 million people where more than 50 percent of the population are below the poverty line.
In turn, the devaluation had backlashed on São Paulo's Southern industrial belt where the (official) rate of unemployment had reached 17 percent in 1998. In the days following Black Wednesday January 13th, multinational companies including Ford, General Motors and Volkswagen confirmed work stoppages and the implementation of massive lay-offs of workers.7
Getting the Green Light from Wall Street
After his busy weekend schedule in Washington, Finance Minister Malan hurried to New York for an early morning encounter (Wednesday the 20th of January) at the Federal Reserve Bank: on "the breakfast list": Quantum Hedge Fund George Soros, Citigroup Vice-President William Rhodes, Jon Corzine from Goldman Sachs and David Komansky of Merrill Lynch.8
This private meeting held behind closed doors with Brazil's "creditors of last resort" was crucial: Rhodes had headed the New York Banking Committee on behalf of some 750 creditor institutions; he had first dealt with Fernando Henrique Cardoso (when he was Finance Minister) to negotiate the restructuring of Brazil's external debt under the Brady Plan.9 The latter coincided with the launching of the 1994 Real Plan on behalf of creditors and speculators. The pegged exchange combined (with the structure of high interest rates under the Real Plan) served to boost the internal debt from 60 billion in 1994 to more than 350 billion in 1998...
Although the results of the breakfast meeting were not made public, Bill MacDenough of the Federal Reserve Bank (who had carefully organised the event), confirmed that Brazil's external and internal debts were considered to be within manageable limits: "it is not necessary [at this stage] to reschedule Brazil's external debt".10 Caving in to his Wall Street masters, Finance Minister Malan fully acquiesced: there will be "no renegotiation" nor debt forgiveness for Brazil...11
Background of the IMF Agreement
At first sight, the plight of Brazil appears as a standard "re-run" of the 1997 Asian currency crisis. The IMF's lethal "economic medicine" is broadly similar to that imposed in 1997-98 on Korea, Thailand and Indonesia. Yet there was a striking difference in the "timing" (ie. chronology) of the IMF ploy: in Asia, the IMF "bailouts" were negotiated on an ad hoc basis "after" rather than "before" the crisis. In other words, the IMF would only "come to the rescue" in the wake of the speculative onslaught, once national currencies had tumbled and countries were left with unsurmountable debts.
In contrast, in Brazil the IMF financial operation was negotiated "before" as part of a new standing IMF-G7 arrangement. The "economic medicine" was meant to be "preventive" rather than "curative". Officially it was intended as a means to "prevent the occurrence" of a financial disaster. Moreover, the money under the preventive scheme was made available "upfront" "before" (rather than in the wake of a currency devaluation).
Preventive Economic Medicine
This "preventive scheme" announced by President Clinton was launched in late October. the leaders of Group of Seven nations had agreed "to help economically healthy nations" stave off the dangers of currency speculation. A multi-billion dollar "precautionary fund" had been set up. Its stated objective was to prevent the "Asian flu" from spreading to other regions of the World...12.
Brazil was first in line under the IMF-G7 scheme: part of the money had already been earmarked to support President Fernando Henrique Cardoso's "efforts at stabilising" the Brazilian economy. Barely two weeks later on November 13th, the government of Brazil submitted its "Letter of Intent" addressed to the IMF Managing Director Michel Camdessus. Attached to the letter was the "Memorandum of Economic Policies" carefully drafted in the usual economic jargon in conformity with IMF guidelines.
Detailed negotiations on a multi-billion dollar package (equivalent in real terms to "half a Marshall Plan") had been carried out. Already in July 1998, Washington had instructed Brasilia not to tamper with the rules governing the multi-billion dollar futures and options trade on the São Paulo exchange: "temporary exchange controls would have defused the situation, but that is a no-no in the IMF's books, because it would undercut the lucrative games of international finance..." 13
Lucrative?... The sheer magnitude of the money appropriated is mind-boggling: during a 6-7 month period (July 1998-January 1999) 50 billion dollars of foreign currency reserves (largely transacted through BOVESPA options and futures contracts) had been appropriated by private financial institutions. Equivalent to 6 percent of Brazil's GDP, the money confiscated through capital flight was to be "lent back" to Brazil in the context of the 41.5 billion dollar operation...
"Up Front Fiscal Adjustment"
In constant liaison with Brazil's Wall Street creditors, the main Washington actors of this multi-billion dollar ploy were First Deputy Managing Director Stanley Fischer at the IMF and Deputy Secretary Lawrence Summers at the US Treasury. The World Bank, the Interamerican Development Bank (IDB) and the Bank for International Settlements (BIS) were also involved in putting the financial package together.
Imposed by Brazil's creditors, the IMF programme was to include:
"a large up-front fiscal adjustment of over 3 percent of GDP with reforms of social security, public administration, public expenditure management, tax policy and revenue sharing that confront head-on the structural weaknesses that lie at the root of the public sector's financial difficulties".14
Finishing touches to the multi-billion scam were completed at IMF Headquarters in Washington in the night of November 12th; the agreement was formally announced by the IMF Managing Director Michel Camdessus the following morning in a press conference:
"I believe that the soundness of Brazil's program and the authorities' commitment to it together with the strong support demonstrated by the official international community provide the conditions for Brazil's private creditors now to act to help ensure its success". 15
And who were these private creditors "helping to ensure its success"? The same Wall Street financiers (and their affiliated hedge funds) involved in the speculative onslaught against the Brazilian Real...
The IMF Agreement Contributes to Fuelling Capital flight
The 41.5 billion dollar financial package was intended to "restore confidence". However, rather than staving off the speculative onslaught, the IMF sponsored rescue operation contributed to accelerating the outflow of money wealth. Twenty billion dollars were taken out of the country in the two months following the approval of the IMF precautionary package: an amount of money of the same order of magnitude as the massive "up-front" budget cuts required by the IMF.
Marred by capital flight, Brazil's money wealth was being plundered: in the months preceding the January financial meltdown, the outflow of foreign exchange reserves was running unabated at a rate of 400 to 500 million dollars a day... Capital flight during the first two weeks of January was of the order of 5.4 billion dollars (according to official sources).
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