IMF announces $30 billion aid package for Brazil

The IMF will be granting a $30 billion loan to Brazil after the US reversed its earlier stance of opposing Fund assistance to the cash-strapped country. The following two articles explore the possible motives behind the Bush administration’s volte-face, pointing to reports that US banks’ considerable exposure to the Brazilian economy and the prospect of a leftist victory in the country’s impending presidential polls may have been what prompted the loosening of the purse strings.

by Chakravarthi Raghavan

GENEVA: The International Monetary Fund announced in Washington on 7 August its agreement or intention to lend Brazil $30 billion to try to prevent a financial meltdown threatening to devastate the region and have repercussions across the global markets at a time of great uncertainty and downturn in the world economy.

While earlier financial packages (for Mexico and South Korea) were higher than this $30 billion, in the other packages, the IMF’s own funds committed were less.

The $30 billion announced is to be in addition to the already sanctioned $15 billion package for Brazil (most of which, according to a report in the Washington Post, has been drawn down already).

It is known to be a much higher figure than what the Brazilian government had been seeking, and higher than the $25 billion that financial experts had been expecting after the US Treasury Secretary Paul O’Neill had been forced to apologize and take back his earlier charges that money lent to the Latin American region would only end up in Swiss banks.

The reaction to his “loose cannon” remarks was so violent that the White House had to intervene and virtually apologize, and the US Treasury Department issued a statement praising the Brazilian economic policy.

The package for Brazil comes after the emergency injection of a $1.5 billion cash advance from the US Treasury for Uruguay (to be returned when the IMF sanctions a package as now expected).

The general expectation of those following the US/IMF scene is that Argentina too would get a loan and reprieve, but that being already in default to private creditors, it may not need a package as large but sufficient to repay the instalments owed to the IMF and the World Bank.

The package of loans for Brazil, publicly promised and announced by the IMF head Horst Kohler, is expected to be agreed to by the IMF Executive Board when its members get back to their desks after vacation.

The conditionalities for the loan - financial, economic and political - are still to be unveiled.

In the case of Brazil, 80% of the loan is to be disbursed in 2003 after a new president has assumed office - Washington and the IMF have an eye on the outcome of the October elections - with two of the three frontrunning candidates (Luiz Inacio ‘Lula’ da Silva and Ciro Gomes) having so far refused to commit themselves to the IMF terms (a demand that is known to have been voiced by the IMF privately). Jose Serra, the chosen nominee of incumbent President Cardoso, has been running third in the opinion polls.

In the earlier bailouts in Mexico (after the 1994 peso crisis) and South Korea (in the 1997 Asian crisis), the total package of financial aid held out was much larger - $50 billion for Mexico and $58 billion for South Korea. But it was a package contributed to by a variety of sources; neither country had as much as what Brazil is now being promised from the IMF funds itself.

About-turn

The George W. Bush-Dick Cheney administration which took office in the US railing against the previous Clinton administration’s “bailout packages” has clearly made a reversal of course - and done it in a spectacular way.

Perhaps they decided that for any reversal, it was better to announce a package which was higher than what the markets had expected and thus hit speculation and avert a financial meltdown.

What caused the reversal is not very clear, except that it is a mixture of the domestic market crisis over the scandals involving Wall Street and the big companies and banks, coupled with the embroilment of leading politicians and Bush and Cheney themselves personally in the scandals (Harken and Haliburton respectively) and the repercussions it is having. With some new disclosure coming out every day, the end is not in sight for the unravelling US domestic scene and its impact on the rest of the world.

And clearly, if Bush and Cheney decide to embark on a foreign adventure to bring about a “regime change” in Baghdad - foreign wars and wrapping oneself up in the flag to divert attention from domestic political storms are not unknown in US history - the last thing they need is a crisis in their own backyard, triggered by the loose utterances of the US Treasury Secretary. It is clear that O’Neill was sent down to Brazil, Argentina and Uruguay recently to patch things up and with a big enough financial package to impress the markets.

The initial comments from Brasilia make clear that the US has not won over that country to back the US drive for an agreement to establish a Free Trade Area of the Americas; what effect it may have on the negotiations at the WTO remains to be seen. Whether a political price, in terms of at least silence over any US adventure in Iraq, is to be paid remains to be seen too.

But governments in Latin America are being forced to reckon with civil society and public discontent over the failure of the decade-old neoliberal policies (first under the Washington Consensus, and later refashioned as globalization), and senior policymakers often confess in private that they are constrained in many ways.

Some early comments from Brazil suggest that the IMF package appears to have been tailored such that both the two leading presidential candidates opposing the present course will not repudiate it. ‘Lula’ da Silva, at an early stage of his campaign, had threatened to declare a debt moratorium but since then has been quiescent; and Gomes has made no bones of his opposition to the IMF-ordained sacrifices. And both have refused to back the IMF package. (SUNS5178)                                             

From Third World Economics No. 286 (1-15 August 2002)