The Brazilian financial scam

Brazil, which under the regime of President Cardoso has been vigorously pursuing neo-liberal policies, is now in the throes of a serious financial crisis. With more than half its population subsisting below the poverty line, its attempt to secure an IMF bailout by instituting even more ruthless neo-liberal reforms will have a devastating social impact.

by Michel Chossudovsky

IN Brazil, a multi-billion-dollar financial scam is in the making. The IMF-sponsored operation is a 'rerun' of last year's speculative raids on South-East Asia which led to the confiscation of more than $100 billion of hard currency reserves. On 11 September, amidst turmoil on the Sao Paulo stock exchange, some $1.7 billion had quietly left the country in a single day. In October, the pace of capital flight (funnelled through the forex market) was running at the pace of $400 million 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 'to all sorts of corrupt practices' (Jornal do Brasil, 5 October 1998). Instead, short-term interest rates had been artificially boosted to 50% 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 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. It is a modern form of highway robbery: since July 1998, $30 billion 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 Cardoso government in consultation with the world's largest commercial banks and brokerage houses. The central bank was to uphold the Brazilian reales 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 'lend the money back' to Brazil in the context of a 'Korean- style' rescue operation which will eventually require the issuing of large amounts of public debt in Group of Seven (G7) leading industrial countries. The Brazilian authorities have insisted that the country 'is not at risk' and what they are seeking is 'precautionary funding' (rather than a 'bailout') to stave off the 'contagious effects'of the Asian crisis. Ironically, the amount considered by the IMF ($30 billion) is exactly equal to the money 'taken out' of the country (during a three-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 bailout 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 - i.e. to reimburse the speculators. The bailout money will never enter Brazil.

Behind-the-scene negotiations

The South-East Asian bailouts constitute a 'dress rehearsal' for similar multi-billion-dollar 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-scene 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 G7 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 (IIF). 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 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: 'the budget adjustment will be dramatic, definitive and permanent'. To 'restore business confidence' (according to a representative of Goldman Sachs), Brazil must implement 'an overshoot on fiscal adjustment' (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 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 (i.e. 3% 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 IMF bailout 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 crossroads

The social impact in Latin America (where the IMF-sponsored structural adjustment programme has been routinely applied for more than 10 years) is likely to be far more destructive than in South-East Asia. While G7 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 the 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 crossroads as speculators and creditors extend their grip into Latin America: the IMF-sponsored financial scam (implemented in Russia and South-East 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. (Third World Resurgence No. 99, November 1998)

Michel Chossudovsky is Professor of Economics, University of Ottawa, and 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

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: