IMF package for Brazil is bailout for US banks, say US media reports

Although ostensibly designed to pull Brazil back from the brink, the IMF rescue package also serves to aid and shield major US and European banks with serious exposure in Brazil.

Chakravarthi Raghavan

THE $30 billion loan package for Brazil announced by the IMF in Washington on 7 August will basically aid and shield some major US banks with large exposure in Brazil, several US media reports said on 9 August.

The IMF announced the package without requiring the formal agreement of the presidential candidates in the October elections, contenting itself with their announcements of broad support, the New York Times and the Washington Post said.

Brazil has drawn down most of the $15 billion loan that the IMF had given earlier, while the bulk (80%) of the new loan would be available only after the new government takes over and follows the IMF policy advice about a primary budget surplus to service the debt, media reports said.

According to the US and European media reports, the exposure of various US banks is as follows: CitiGroup $12.8 billion, FleetBoston $11.1 billion, JP Morgan $2.7 billion and Bank of America $2 billion. Both CitiGroup and FleetBoston have already taken major hits in the Argentine crisis.

Nine European banks are said to have a $1 billion exposure in Brazil. The Financial Times has not given figures of individual bank exposures, but identified the banks as: Santander Central Hispano and BBVA of Spain, HSBC and Lloyds TSB of the UK, ABN Amro of the Netherlands, Deutsche Bank of Germany, Switzerland’s Credit Suisse, BNP Paribas of France and BNL of Italy.

Two leading personalities involved in the bailouts under President Clinton - US Treasury Secretary Robert Rubin who engineered the financial packages for Mexico, Russia and some Asian countries, and Stanley Fischer, the Deputy Managing Director of the IMF who handled these matters at the Fund - are now both at CitiGroup.

A New York Times report said that the Bush administration had political and diplomatic reasons to reverse its prior stance of ‘tough love’ when it came to Brazil. The IMF package, the report said, had been ‘carefully structured to affect Brazil’s upcoming election, in which two leading left-wing candidates are in the lead and had been threatening to reverse Brazil’s free-market approach to economic and trade’. Most of the loan cannot be tapped until after the election, and the left-wing candidates strongly implied on 9 August that they will continue the current belt-tightening budget policies in order to satisfy the IMF.

The Washington Post quoted John B Taylor, US Treasury Under-Secretary, as stressing the ‘good policies that Brazil has been following’ and explaining that the IMF loan is structured so that it can be cut off if the next government engages in profligate spending. ‘If you look at the schedule of payments, much of them are coming due in 2003, and the funds will be available only if sustainable policies are followed,’ Taylor is quoted by the WP as adding.

The NYT report said that President Bush’s hope of negotiating a giant free-trade agreement covering all of Latin America would have been crippled if Brazil were forced to default on its debt. Brazilian leaders had already been balking at calls for a free-trade agreement and would probably have refused to embrace the talks if they had been denied aid.

According to the NYT report, a representative for CitiGroup ‘could not say whether bank executives had lobbied in favour of a rescue package for Brazil. But other banking leaders have spoken out vocally.’

Paul Erdman, in a commentary on CBS MarketWatch <>, said that the bailout of Brazil, coupled with the recent grant by Congress of fast-track negotiating authority to Bush, meant that Bush ‘is going to return to his agenda of pushing for a Western Hemisphere free-trade zone before the end of his second term’.

Erdman’s column also added: ‘The fact that the Brazilian bailout also gave a big boost to CitiGroup and FleetBoston - which combined had close to $20 billion at risk in Brazil - will hardly go unnoticed when it comes time to raise campaign funds among the Wall Street elite.’

An international financial expert who did not want to be named described the IMF package as ‘handcuffs’ on the presidential candidates.

Another expert, commenting on the complete U-turn of Washington and US Treasury Secretary Paul O’Neill (who had earlier suggested that any assistance to the Latin American economies would only be siphoned off to Swiss bank accounts), and in the light of the disclosure of the US banks’ exposure, said: ‘Maybe O’Neill discovered, or his friends in Wall Street and the IMF advised him, that the loan to Brazil won’t end up in Swiss banks, but as in Mexico would merely enable the US banks to get paid. And unlike in the Mexico package by Rubin and company, when the US taxpayer paid the bill, here it is all IMF funds...’

The New York Times columnist Paul Krugman, while praising Brazil’s current policies and the leadership of current president Fernando Henrique Cardoso and castigating as ‘unforgivable’ O’Neill’s earlier remarks (re Swiss banks), nevertheless expressed some queasiness about the loan.

One reason is who exactly is being bailed out, he says, citing Erdman’s column about the loan being a rescue of US banks.

In a more introspective way, Krugman refers to the fact that the IMF-World Bank-Washington economic policies and reforms have not worked in Latin America, and that the people (in Mexico, Brazil and other countries) are now worse off with per capita incomes below their levels in 1980. He ponders: ‘Why hasn’t reform worked as promised? That’s a difficult and disturbing question.’

He confesses that he too had been in support of much, though not all, of the Washington Consensus, and says: ‘But now it’s time, as Berkeley’s Brad DeLong puts it, to mark my beliefs to market. And my confidence that we’ve been giving good advice [to Latin America and other developing countries] is way down. One has to sympathise with Latin political leaders who want to temper enthusiasm for free markets with more efforts to protect workers and the poor.

‘What that suggests to me is that the United States should be very cautious about what it expects for its money. Pulling Brazil back from the brink doesn’t mean that we are once again in a position to demand that Latin Americans do things our way. The truth is that we’ve lost a lot of credibility with our southern neighbours. If we overplay our hand, we’ll lose whatever is left.’

The Washington Post cautioned, however, that many analysts feel that the Brazilian government debt, now exceeding $250 billion, is so burdensome that the government will have to restructure it at some point - ‘and until bankers and bondholders are persuaded to go along, Brazil will never be able to banish market jitters’. The report cites Morris Goldstein, former IMF economist and now a scholar at the Institute for International Economics, as saying that because the IMF and the administration are not insisting on a debt restructuring, the big loan for Brazil will eventually suffer the same fate as a rescue launched a year ago for Argentina, which ended disastrously in debt default five months later.                  

The above first appeared in the South-North Development Monitor (SUNS - issue no. 5179), of which Chakravarthi Raghavan is the Chief Editor.