BACK FROM THE BRINK

November 13, 1998

Charles Krause reports on the IMF agreement with Brazil.

CHARLES KRAUSE: It was this summer after the financial crisis in Asia spread to Russia and began to create near panic on Wall Street that the United States and the IMF decided that if the crisis was to be stopped, it would have to be stopped in Brazil. The world's ninth largest economy, Brazil was vulnerable because its currency, the "real", was thought by many economists and many speculators to be sharply overvalued. But averting the devaluation was not easy. The agreement between the IMF and Brazil would have to be both credible to the world's financial markets and politically acceptable to the Brazilians. It took months - and it wasn't until today in Washington that International Monetary Fund managing director Michel Camdessus was able to announce the long-awaited $42 billion rescue package. MICHEL CAMDESSUS, Managing Director, IMF: Today, the Brazilian authorities and an IMF team have successfully concluded negotiations under - on a strong three-year program of economic and financial reform. CHARLES KRAUSE: The $42 billion stabilization package will come from a variety of sources. By far, the largest portion will come from the IMF, $15 to $18 billion. Another $9 billion will come from two other international financial institutions based in Washington: The World Bank and the Inter-American Development Bank. $5 billion more will come from the United States. But the last $10 billion will come from Britain, Germany, and other industrialized nations. For its part, Brazil has agreed to continue to implement a tough austerity plan designed to transform budget deficits into budget surpluses by next year. Professor Riordan Roett is a Brazil expert at the Johns Hopkins School of Advanced International Studies in Washington. RIORDAN ROETT, Johns Hopkins School of International Studies: And Congress has got to act to cut public spending. The state governors and mayors have got to rein in their spending, and they've got to begin to introduce real discipline in the Social Security system to fire public employees and begin to live within their means, which Brazil has not done for a number of decades. CHARLES KRAUSE: Over the past several months, as today's IMF agreement was being negotiated, nervous investors and currency speculators were taking no chances. Fearful of a devaluation, they depleted Brazil's foreign currency reserves by nearly half, moving billions of dollars out of the country. To try to stop the outflow, Brazil's central bank was forced to raise interest rates above 40 percent, which kept some of the money in savings accounts but essentially froze the real economy. As a result, thousands of workers have been laid off as the high interest rates squeezed credit and the buying power of both businessmen and consumers. Anticipating a recession, Brazil's Bovespa Stock Market Index has fallen by more than 37 percent since the beginning of the year. Still at the heart of the government's economic program is the prevention of a return to hyperinflation, a goal that's been achieved so far by keeping the real from losing its value. Now with another $42 billion from the IMF to defend the real against speculators, the hope is that confidence will return to Brazil and by extension to the whole global financial system. RIORDAN ROETT: Investors, I think, are desperate right now. We've seen the collapse of the Asian markets. We've seen the collapse of Russia. And Latin America is the last of the healthy emerging markets. Brazil is the weakest link in that emerging market chain in Latin America, so, therefore, it's absolutely critical that Brazil, as the largest economy in the region, be shored up, given time and space to work out a problem so that the contagion doesn't continue to spread throughout Latin America. CHARLES KRAUSE: Brazil is of particular importance to the United States, both economically and geographically. So there was a real desire in Washington to devise a rescue package that would be both credible and would not do political damage to Brazil's president, Hernando Enrique Cardozo. Re-elected just last month, Cardozo is viewed as a strong and capable leader. And since his re-election, he's tried his best to prepare Brazil for the tough austerity measures he knew the IMF agreement would require. Today, markets in both Sao Paolo and on Wall Street were up slightly.

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