By Paul Blustein Washington Post Staff Writer Saturday, August 4, 2001; Page A01
The International Monetary Fund, hoping to douse financial crises that have flared across Latin America, announced yesterday that it is preparing to grant a $15 billion emergency line of credit to Brazil and speed up a $1.2 billion loan installment for Argentina.
Although officials hinted in recent days that both moves were in the works, the speed with which they were announced underscored the deep concern among IMF and U.S. policymakers over the dangers posed by the crisis in Argentina, which has been festering for months. Fears among investors and lenders that Argentina will be forced to default on its $128 billion debt and devalue its currency, the peso, have roiled markets throughout the region, particularly in Brazil, dragging its currency to historic lows.
The prospect that the crises in Latin America might spin out of control, as Asia's did in 1997-98, presents the IMF and the Bush administration with a new source of worry about the health of the global economy at a time when growth is faltering in the three major industrialized economies -- the United States, the European Union and Japan.
In addition, an economic implosion in Argentina or Brazil would undermine Washington's case for the free-market policies that both countries have followed, and would deal a severe blow to the administration's plans for a free-trade zone in the Western Hemisphere.
The planned aid for Brazil and Argentina was announced by IMF Managing Director Horst Kohler. The proposal must be approved by the IMF board, which represents the organization's 183 member countries. Approval is a virtual certainty; IMF officials never make such pronouncements without ensuring themselves of board backing first.
The IMF action is aimed at reversing a slump in Latin American markets that has proven resistant to a host of official measures aimed at boosting confidence among investors, lenders and bank depositors, including the approval by the Argentine government of painful cuts in its budget deficit.
Kohler's announcement came late yesterday afternoon, after Latin American markets failed to rally despite comments Thursday by John Taylor, the U.S. undersecretary of the Treasury for international affairs, supporting the idea of speeding up loan disbursements for Argentina.
Taylor said he expected the IMF would soon release a $1.2 billion installment for Argentina that had been scheduled for mid-September under the terms of a package totaling $13.7 billion.
Bush administration officials have criticized giant international rescue packages of the sort that Asian countries, Russia and Brazil received during the global financial crisis of the late 1990s. In a recent interview in the International Herald Tribune, Treasury Secretary Paul H. O'Neill spoke dismissively of those rescues, saying "the IMF rides in on its horse and throws money at everybody and the private-sector people get to take their money out."
But the IMF's announcement about Brazil suggests the administration is prepared to support bailouts for countries that Washington considers economically or strategically important, provided their governments are embracing sound economic policies. Another example came in the spring, when an $11 billion package for Turkey was increased by $10 billion. Yesterday, the IMF released another $1.5 billion installment from that package of loans.
O'Neill and other U.S. officials have made clear that they believe Brazil deserves aid because it met the conditions of the $41 billion bailout it received in 1998.
Kohler stressed that point in his announcement.
"The Brazilian authorities are strengthening fiscal and monetary policies and implementing their structural reform agenda in the face of a difficult external environment," he said. "In light of Brazil's strong track record, and the strengthened measures it plans to implement under the program, I am prepared to recommend this new program to the IMF's Executive Board." Brazilian officials will announce next week the measures they plan to take, he added.
In his announcement, Kohler also praised the Argentine government for having "demonstrated a strong commitment" to maintaining the fixed value of the peso "and to decisive implementation of the package of measures designed to achieve a zero fiscal deficit. . . . In view of these resolute efforts, the IMF stands ready to support Argentina."
Now the question is whether the IMF's announcement will buoy market confidence in the region next week. In recent days, analysts have voiced skepticism that the IMF will increase the size of its loan package for Argentina beyond its current $13.4 billion. Officials in Buenos Aires have said privately that they are hoping for as much as $6 billion more, however, and the speed with which the IMF came to the aid of Brazil may encourage the belief that more help is on the way for Argentina.
"It's an indication that [IMF and U.S. officials] are very worried about contagion, worried about global risks and worried about weakness," said Morris Goldstein, a former IMF official now at the Institute for International Economics. "I think it's too much" for Brazil, he said, "but they're trying to do things now, to try and limit" the fallout.