THIRD PART OF THREE
Enticing Speculators
The IMF sponsored operation was largely instrumental in enticing speculators to persist in their deadly raids; "The money was there" to be drawn upon. If the Central Bank of Brazil were to contemplate defaulting on their foreign exchange contracts, the availability of IMF-G7 money "upfront" financing would enable banks, hedge funds and institutional investors to swiftly collect their multi-billion dollar loot. The IMF programme signed in November thereby contributed to reducing the risks and "reassuring speculators" that the Central Bank would uphold the Real.
Moreover, if central bank reserves were to bottom out, the authorities would have immediate access to the first tranche (9 billion dollars) of the IMF rescue package to meet their forex contracts. In the words of IMF Deputy Managing Director Stanley Fischer:
"Because you want to provide reassurance to the markets that you're not sort of slicing it very, very thin. You want the markets to know there is a sufficient amount [of foreign exchange reserves in the Central Bank of Brazil] available comfortably".16
Declining Central Bank Reserves
>From 75 billion dollars in July 1998, central bank reserves dwindled to 27
billion in January 1999. The first tranche of the IMF loan of more than 9
billion dollars had already been squandered to prop up Brazil's ailing
currency; the money was barely sufficient to "finance the flight of
capital" in the course of a single month.
"As it is the $41.5 billion of foreign currency that the IMF marshalled to back Brazil's currency, was doomed to end up with the speculators, leaving Brazil with its foreign currency debt increased by that amount. So often has this scenario been played out (...) of other currencies kept at artificial heights with interest rates, that by now the ploy should be known to schoolboys. The government whose currency is attacked draws on foreign loans arranged by the IMF, and turns over the foreign currency to buy back its own paper. The "assisted" country ends up with the foreign debt to the amount of the "aid" while the speculators pocket the proceeds of the loans, and move on to the next replay of the scam."17
Hidden Agenda
In the above scenario, the approximate "timing" of the devaluation was part of the IMF ploy; by ensuring a stable exchange rate over a 60 days period (13 November 1998-13 January) it had allowed speculators to swiftly cash in on an additional 20 billion dollars...
In this regard, the IMF had insisted that Brasilia maintain the stability of the exchange rate as part of the agreement signed in November. Capital flight had been speeded up after the November 1998 agreement; both Wall Street and the Washington institutions knew that a devaluation was imminent and that the IMF-G7 sponsored preventive package was nothing more than a "stop gap measure".
In other words, the IMF programme under the "preventive" fund enabled currency speculators "to buy time". The Central Bank was "to hold in" as long as possible. The hidden agenda was to trigger financial collapse; Wall Street knew it was coming... The economic team at the Ministry of Finance was said "to be taken by surprise" but they knew all along that the devaluation was coming... In January, the IMF agreed to let the currency slide. By that time it was too late, Central Bank forex reserves had already been ransacked...
Collapse of the Real
In the wake of the January crisis, the IMF had wisely recommended a 20 billion dollar "floor" for Central Bank Reserves. (Reserves were at 75 billion dollars six months earlier). The setting of a "floor" --decided by the IMF rather than by the Central Bank-- played a key role in fostering capital flight in the immediate wake of the devaluation: the pillage of forex reserves was to continue unabated until the "floor" was hit. Also in January, the IMF had promised to release a second 9 billion dollar tranche, with the added advantage to speculators of comfortably "uplifting" forex reserves significantly above the 20 billion dollar floor.
"A Marshall Plan for Creditors and Speculators"
In other words, this fresh gush of IMF-G7 bailout money was meant to replenish Central Bank reserves ("on borrowed money") with a view to encouraging a renewed wave of capital flight. The IMF Managing Director Michel Camdessus (who certainly knew what was coming) had already confirmed in November 1998 that "if the Brazilian authorities have a need for [additional financial] resources ... [they] could have access to that second tranche much earlier, as early as about the turn of the year." 18. Ironically, that was precisely the time at which the Real-dollar peg broke down...
The IMF's presumption was (both prior and in the wake of the devaluation) that the Central bank should continue to sell its forex reserves... And with more IMF-G7 (borrowed) money coming into the coffers of the central Bank, in all likelihood capital flight will continue in the months ahead despite the 20 percent January devaluation of the Real... Very lucrative: in the week following the financial meltdown of January 13th, capital outflows were already running at 200 to 300 million dollars a day.19 And Finance Minister Pedro Malan had agreed at his Wall Street breakfast meeting with George Soros and William Rhodes (January 20th) that no controls or impediments on the movement of money would be introduced...
Towards an Inflationary Spiral
A deadly economic process had been unleashed: the devaluation had triggered an inflationary spiral which had contributed --alongside the application of massive austerity measures-- to brutally impoverishing all sectors of the Brazilian population including the middle class.
Historically in Brazil under a flexible exchange regime, wages had been adjusted on a monthly basis in accordance with increases in the cost of living. The plight of Brazil today, however, differs markedly from the inflationary environment prevailing in the period prior to the 1994 Real Plan.
In the present situation, the IMF agreement signed in November explicitly required the deindexation of wages as "a means of combating inflation". In the IMF book, increased wages are viewed "as the main cause of inflation". Similarly, the authorities have justified the increased levels of unemployment ("a necessary evil") on the grounds that increased unemployment is an effective means of dampening inflationary pressures.
In other words, after having unleashed a fatal inflationary spiral through currency devaluation, the IMF was demanding the adoption of a so-called "anti-inflationary programme". The latter, rather than addressing the causes of inflation, constituted a coherent framework for rapidly laying off workers and compressing wages (through deindexation).
Moreover, under the IMF agreement, monetary policy in the hands of Wall Street creditors, who have the ability to freeze State budgets, paralyse the payments process including transfers to the State governments and thwart (as in the former Soviet Union) the regular disbursement of wages to public sector employees including several million teachers and health workers.
"Programmed Bankruptcy"
"The programmed bankruptcy" of domestic producers has been instrumented through the credit squeeze (ie. extremely high interest rates), not to mention the threat by Finance Minister Pedro Malan to allow for trade liberalisation and (import) commodity dumping with a view to "freezing price increases" and obliging domestic enterprises "to be more competitive".20 Combined with interest rates above 50 percent, the consequence of this policy for many domestic producers is tantamount to bankruptcy, -- ie. pushing domestic prices below costs...
In turn, the dramatic compression of domestic demand (ie. resulting from increased unemployment and declining real wages) has led to a situation of oversupply and rising stocks of unsold merchandise...
This ruthless demise of local industry --engineered by macro- economic reform-- has also created an "enabling environment" which empowers foreign capital to take over the internal market, reinforce its stranglehold over domestic banking and enable it to pick up the most profitable productive assets at bargain prices...
In other words, the financial crisis (evolving from the inception of the Real Plan in 1994) has created conditions which favour the rapid recolonisation of the Brazilian economy. The depreciation of the Real will speed up the privatisation programme as well as depress the book value (in Reales) of State assets. The IMF's "up- front fiscal adjustment" --combined with mounting debt and continued capital flight-- spells economic disaster, fragmentation of the federal fiscal structure and social dislocation.
Implications for Latin America
The Brazilian financial meltdown has far-reaching implications for Latin America as a whole where heavily indebted countries have been crippled by macro-economic reform for more than fifteen years.
In this regard, the financial crisis creates an environment which strengthens throughout the region, the stranglehold of Wall Street creditors over monetary policy under the stewardship of the IMF.
In Argentina, the demise of the central bank is already firmly in place under the "currency board" arrangement. The latter is essentially a colonial-type banking system. Since the Brazilian financial crisis, discussions are underway in Buenos Aires towards the replacement of the Argentinian peso by the US dollar, implying not only the complete control over money creation by external creditors but also the printing of banknotes by the US Federal Reserve (which is controlled by a handful of private US banking institututions).
Following the Argentinian model, other countries may wish to follow suit, viewing the replacement of their national currencies by the US dollar as a way of avoiding a financial crisis.
However, in all likelihood the "dollarisation" process (under the Washington Consensus) will be instrumented through speculative attacks which significantly depress the value of national currencies against the dollar (ie. in anticipation of negotations concerning the replacement of those national currencies by the US dollar).
Disarming the Neoliberal Agenda
"Economic crimes against humanity"?... Those responsible in Brasilia, Washington and New York should not be allowed to walk away as if did not know... The monetary authorities of G7 nations and fourteen other countries co-financed the IMF sponsored scam (through the Bank of International Settlements). The governments were fully aware of the implications of the IMF loan agreement. They bear a heavy burden of responsibility in endorsing a multi- billion dollar scam conducive to the brutal impoverishment of the Brazilian people.
While the international community stands reluctant to disband the Washington consensus and disarm financial markets, there are indications that similar speculative assaults are to be launched in other countries in Latin America, Asia and the Middle East with devastating economic and social consequences. ____________________________________________
NOTES
1. A 90 days moratorium was declared. See Financial Times, London, January 18, 1999, p. 4.
2. Ibid.
3. Official figures, see Estado de São Paulo, 21 January 1999.
4. Wall Street Journal, New York, 6 January 1999.
5. IMF News Brief No 99/3, Washington, 18 January 1999).
6. World Bank News Release, Washington, 18 January 1999.
7. See Larry Rohter, Crisis Whipsaws Brazilian Workers, New York Times, January 16th, 1998.
8. Estado de São Paulo, 21 January 1999.
9. See Michel Chossudovsky, The Globalisation of Poverty, Impacts of IMF and World Bank Reforms, Third World Network, Penang and Zed Books, London, 1997, p. 182.
10. Estado de São Paulo, 21 January 1999.
11. Ibid
12. For further details see Michel Chossudovsky, the G7 "Solution" to the Global Financial Crisis : A Marshall Plan for Creditors and Speculators, Ottawa, 1998.
13. Wall Street Journal, 6 January 1999.
14. IMF Press by Michel Camdessus and Stanley Fischer, Washington, November 13, 1998. See also "Letter of Intent" and "Brazil: Memorandum of Economic Policies", IMF, Washington, 13 November 1998.
15. IMF Press Conference, op cit
16. Ibid
17. Wall Street Journal, op cit.
18. IMF Press Conference, op cit.
19. Estado de São Paulo, 21 January 1999.
20. The underlying "model" is that of the Ukraine where under IMF advice (1994) US grain surplus were dumped on the domestic market with a view to stabilising domestic prices but with the ultimate effect of destroying domestic producers.
Michel Chossudovsky
Department of Economics,
University of Ottawa,
Ottawa, K1N6N5
Voice box: 1-613-562-5800, ext. 1415
Fax: 1-514-425-6224
E-Mail: chossudovsky at sprint.ca
Recent articles by Chossudovsky on the global economic crisis at:
http://www.transnational.org/features/g7solution.html http://www.twnside.org.sg/souths/twn/title/scam-cn.htm http://www.interlog.com/~cjazz/chossd.htm http://www.heise.de/tp/english/special/eco/ http://heise.xlink.de/tp/english/special/eco/6099/1.html#anchor1