THE LAST STAND

November 24, 1998
		The IMF put together a $41.5 billion deal to help Brazil defend its economy against the spreading global economic crisis. Asia's and Russia's economies have already been crippled. Will the IMF plan work this time? Return to this forum's introduction.

Will the IMF plan cause a recession in Brazil? Can the IMF restrict the way bailout funds are distributed? Is Brazil's economic problems due to graft? How many years will it take for Brazil to recover? Does this plan deal with the "moral hazard" associated with international bailouts? Viewer Comments     November 13, 1998: A detailed look at the IMF/Brazil deal. October 27, 1998: A look at Russia's collapsing economy. October 20, 1998: The global economic crisis is hurting U.S. companies. October 15, 1998: The Federal Reserve cuts interest rates to fend of an economic downturn. October 9, 1998: A discussion of the global economic crisis. Browse the NewsHour's coverage of economic issues.

And the Online NewsHour asks: An issue raised when any IMF bailout of a troubled economy is announced is that public money is being used to rescue private investors that placed capital into risky ventures and that those same investors do not suffer any of the pain caused by an economic downturn. Does this plan avoid that so-called "moral hazard"? Mary Bush, former IMF executive board member, responds: The moral hazard issue is difficult to (but not impossible) to avoid in the kinds of circumstances we have faced recently where problems in one country have a cascading effect and create the kind of fear and panic in the markets that we have seen recently. That cascading effect, which for Brazil was set off by Russia, and the fear and panic make it essential to take steps to avoid further contagion that threatens the stability of the financial system. The Brazil program seems to take a step forward in avoiding moral hazard because a Letter of Intent has been executed but the program has not yet been formally approved. That approval is expected to be done in tandem with announcements from private lending institutions on their continued participation in financing Brazil. This is a step towards the methods that we used during the 1980's debt crisis wherein private lenders had to reach a "critical mass" of financing before the IMF would go forward with its lending program. Steven Radelet of the Harvard Institute for International Development responds: No, it doesn't. The absence of private creditor involvement is a striking and troubling aspect of Brazil's program. Right now Brazil owes both foreign and domestic creditors the equivalent of over $300 billion, much of which is due to be repaid within the next year. Many of those creditors have been amply rewarded with interest payments of 40% or more. The basic strategy of the current program is to provide Brazil with massive amounts of public sector funds in order to keep the markets calm and ensure that private creditors are fully repaid. The intended message to creditors is quite clear: be calm, stay put, you will be fully paid, and the Brazilian people will make all of the adjustments. In recent months, the IMF has argued that private creditors do not always get bailed out, and have pointed to widespread defaults in Asia as evidence. Unfortunately, these defaults are actually signs of the failure of the programs rather than a result of program design that incorporated burden sharing by the creditors. In the original programs across Asia, the explicit intention was that creditors would get fully repaid, while the Asian economies made all of the adjustments. Since the panic worsened in the months that followed, many of the creditors did not get paid, but it was clearly the intention of the original programs that they would be paid. The single exception to date is Korea, where after the first program did not stop the panic, the IMF and the U.S. Treasury took a new tack that had as its centerpiece the restructuring of $24 billion in debts owed by Korean commercial banks to the international community. The restructuring took pressure off of the exchange rate, calmed the markets, and led to a fall in Korean interest rates. Some public funds were needed to support the program, but not nearly the magnitude being contemplated in the case of Brazil (or what was used in the case of Mexico in 1995). The Korean deal was far from perfect, since the Koran government guaranteed the new bonds, and private creditors ultimately will be fully repaid. But the direct participation of the private sector reduced the amount of public funds that were necessary to support Korea. Korea provides the beginnings of a blueprint for a much better strategy than simple infusions of large amounts of cash. In domestic financial markets in the more advanced OECD countries, bankruptcy proceedings and other regulations ensure that when debtors cannot fully repay their loans, both the creditor and the debtor share the burden in the workout. Similar arrangements simply do not exist in international debt arrangements, so we are left with the current strategy that the debtor makes the adjustments with the anticipation that the creditor gets fully repaid. A major challenge is to develop new international institutions for rational debt workouts that ensure more immediate private sector participation and burden sharing so that public sector funds are not used to simply ensure repayment to private creditors, and so that creditors think a little more carefully about where they lend their money.

REGIONS TOPICS RECENT PROGRAMS ABOUT US FEEDBACK SUBSCRIPTIONS / FEEDS:

Support the kind of journalism done by the NewsHour...Become a member of your local PBS station.
PBS Online Privacy Policy Copyright ©1996- MacNeil/Lehrer Productions. All Rights Reserved.