Brazil's Baleful Bailout

The International Monetary Fund (IMF) came through last week with a larger rescue package for Brazil than world financial markets expected. This should have eased fears about Brazil's future. So far, it hasn't.

After an initial rally, Brazilian interest rates have settled at levels incompatible with long-term solvency. Its benchmark "C bonds" now yield around 22% in dollar terms. Brazil's debt equals 60% of GDP, of which 35% falls due within a year. The IMF has required that Brazil run a "primary surplus" (i.e. interest on government debt is excluded in the budget calculations) of 3.75% on its budget. But this will clearly not be able to prevent a big further deterioration in the country's debt/GDP ratio, especially as high interest rates push Brazil into recession.

The fact that this package failed to bring relief indicates that something is fundamentally wrong with the international financial system. Brazil's problems cannot be blamed on anything Brazil has done wrong; responsibility falls squarely on international financial authorities. Admittedly, Brazil may soon elect a president that global financial markets do not like; but if international financial markets take precedence over democratic choice, the system is undoubtedly flawed.

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