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See No Evil in Brazil

CAMBRIDGE: Brazil survived its elections. President Cardoso has gotten his second term by the skin of his teeth, not with the mandate for which he hoped. Instead of being over, his troubles are only starting.

Cardoso did just about anything to get reelected: spend, borrow, just keep the economy alive until election day. To keep money coming, he shortened the maturity of domestic and foreign liabilities; to keep the music going he gave state governments leeway to spend money they didn't have. It almost worked. Almost, for capital flight is now rampant - $40 billion - and this does not count money the government spent behind the scenes buying back debt to support prices in world markets.

Facts must be faced. Public debt has risen near 40%. The budget deficit is 8% of GDP; the current account deficit comes to 4% in a year where growth is near zero. The maturity of domestic debt is very short, of external debt even shorter. Everything is in a rollover situation where confidence is paramount. Without such, Brazil will go over the cliff faster than Korea.

Why be confident? In fact, there is substantial skepticism, witnessed by capital flight to the order of 4-5 billion $US weekly. The IMF package of $30 billion - don't ask how much of that money is real and can be used - will not provide much in terms of confidence. It will merely finance capital flight for a while, as in Russia.