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Brazil: Another International Bailout Failure?

CAMBRIDGE: The emerging markets crisis has jumped across the Atlantic Ocean, to engulf Brazil and several other Latin American countries. Forecasts of economic growth are being marked down sharply. A couple of months ago, most forecasters expected that Brazil would achieve positive economic growth in 1999. The consensus is now that Brazil will fall into recession. As in Asia, the IMF is riding to the rescue, sponsoring a huge international bailout loan. But as in Asia, the IMF’s recipes could easily do more harm than good, forcing Brazil into an even deeper abyss than it finds itself in right now.

In the interpretation of the IMF and Brazil, there are two main problems facing the Brazilian economy. The first problem is a large budget deficit, estimated to be around 7 percent of the gross domestic product. This, everybody agrees, needs to be reduced sharply, since Brazil is having a very difficult time financing that deficit, either through domestic or foreign borrowing. The second problem is the international financial panic. Foreign investors are fleeing from the Brazil, just as they have from Asia and Russia. This is pushing up interest rates and threatening the value of the currency.

The IMF’s remedy is a large international loan to Brazil, combined with a pledge by the Brazilian Government to cut its budget deficit sharply. The IMF is rounding up the money from the usual sources: its own funds, the World Bank, the Inter-American Development Bank, foreign governments, and to a modest extent, foreign commercial banks.