“We were 76 traveling companions
and only one did not renegotiate; that
was us,” declared Brazil’s Planning
Minister Ant6nio Delfim Netto in a
January 1983 speech attempting to jus-
tify the secret negotiations that had
been conducted with IMF officials since
mid-1982. In the meantime it has be-
come clear that this declaration amounts
Claudia Dziobek is an economist spe-
cializing in Third World debt. She is the
author of ‘Mexican Economy–Creative
Financing to the Rescue” in the Janu-
ary/February 1983 issue of the Report.
to so much talk. The 76 companions-
all heavily indebted countries-are still
together, traveling into the abyss of a
depression that far surpasses that of the
1930s.
For Brazil, that depression has brought
the country to the political and social
boiling point. A summer of labor un-
rest, violence and looting was followed
by the biggest demonstration in Brazil’s
history. 150,000 people gathered on
January 25 in Sio Paulo to demand an
end to 20 years of military rule.
As in Argentina and Chile, the situa-
tion seems to have gotten rapidly out of
control for Brazil’s generals. In 1982,
as the balance of payments was wor-
sening and foreign exchange reserves
necessary for servicing the external
debt were rapidly shrinking, the gov-
ernment insisted that its problems were
in no way comparable to those of other
Third World countries, citing Mexico
as a tragic case of incompetence. The
authorities assumed that, having “grad-
uated” from the world of hunger, pov-
erty and underdevelopment during the
high-growth years of the 1960s and
1970s, Brazil would be spared the hu-
miliation of being put under the tutelage
of IMF “experts.”
Brazil’s military regime-dating from
a 1964 coup-had prided itself in pro-
ducing the “Brazilian miracle” which
attracted over $90 billion in credits
from private Western banks. Flush
with funds, Brazil built major hydro-
electric facilities such as Itaipu on the
Paraguayan border and Tucurui in the
Amazon; steelmills; Ferrovia do Aco,
a railroad through the steel-producing
region; huge aluminum plants; and nu-
clear reactors purchased from West
Germany. Foreign investors and bank-
ers were fascinated by the government’s
mineral development program, Cara-
jas, designed to develop vast regions of
the northeast.
Moreover, Brazilian officials went
out of their way to stress their efficien-
cy and competence in carrying out these
Finance Minister Ernane Galveas.
MARCH/APRIL 1984
projects. As a representative for Banco
do Brasil once put it, “Brazil is a con-
scientious capital-importing country
. . tapping the international markets
in an organized manner, and has fully
demonstrated its ability to manage its
foreign accounts well and consistently.”
Secret Talks with the IMF
It was this image that was at stake
when Brazil ran out of foreign exchange
in the fall of 1982. Delfim Netto, Car-
los Geraldo Langoni, head of the cen-
tral bank, and Finance Minister Ernane
Galv6as decided to begin secret nego-
tiations with the IMF, because, as Del-
fim later explained, the calm surface
had to be maintained to keep credit
lines with private banks open. “Sup-
pose . . . that six months ago I had
said: ‘We will go to the IMF.’ The next
day I would have had to suspend the
foreign exchange market and [be inU ueatmar
Brazil’s financial wizards are flanked by commercial bankers at the January signing of the bail-out agreement in New York City.
fact forced to] go to the IMF.”
Admitting that IMF talks are under-
way is tantamount to announcing you
have the bubonic plague, according to
Delfim’s logic. Banks simply withdraw
support and wait out the agreement.
Secret negotiations prevent the “lim-
bo” felt by most borrowing countries,
producing interruptions in trade flows
and thus shortages in food, intermedi-
ate goods, spare parts. This line of rea-
soning, however, assumed that Brazilian
negotiators were free to sign whatever
agreement they saw fit. And that was
no longer the case.
Moratorium Demanded
Evidently the “economic trio”–
Delfim, Langoni and Galvras-had
not yet adjusted to Brazil’s new politi-
cal reality. Since the November 1982
elections, Congress has included a
sizeable opposition. The opposition
controls a majority in the Chamber of
Deputies and 24 seats out of the 69-
member Senate. When the government
finally owned up after the November
1982 elections, news of the secret ac-
cord with the IMF met with violent
protest throughout the country, fueling
popular discontent.
According to the agreement, the
government promised the IMF to fur-
ther reduce wages by modifying the
wage law that guarantees inflation-
adjusted pay–no trifle in a country
where official inflation figures run over
150% annually. After much discussion
and controversy, the government’s
proposal was soundly defeated by Con-
gress last October, demonstrating to
the government the limits of its power.
Leaders of the PMDB, the major op-
position party, called for an end to
recessionary policies, a rise in real
wages, fiscal reform and, the “elimi-
nation of tutelage” (by the IMF) as a
precondition for reorganizing the for-
eign debt and its service payments.
Compromise legislation was passed
in November, pegging cost of living
adjustments at 87% of the inflation
rate. The vote came after an all night
debate in the Brazilian Congress. It
was the government’s fourth attempt to
gain political backing for its IMF
promise.
The PMDB plan was based on the
work of Celso Furtado, a leftist de-
velopment economist who was allowed
to return to Brazil after years in exile.
In presenting the plan, the PMDB
spokesman told Congress: “It is im-
portant to remember that the modest
resources that this institution makes
available to our country are directed to
other institutions so that we are ex-
changing one creditor for another, in
this case a more demanding one.”
Appealing to Brazil’s political sov-
ereignty and national pride, the party’s
proposal requests immediate suspension
of debt-service and principal payments
for at least three years and an agreement
with creditors to repay the debt accord-
ing to the country’s capacity to produce
an export surplus. “We do not repu-
diate the debt . . we owe . . we do
not deny that . . but we will pay when
we can and how much we can–pre-
serving the standard of living and the
national interest.”
The PDS, Brazil’s government party,
denounced the proposal as “passionate
. . . and politically underdeveloped,”
calling the opposition a bunch of na-
tionalistic student types. Name calling
aside, the proposal cannot be so easily
dismissed. The opposition is too broad
and well organized to be silenced by the repressive measures applied by
other authoritarian regimes in similar
predicaments.
Economic Trio to Economic Duo
The government’s first reaction to
the popular outburst of fury was to
consolidate power within its own ranks.
Rising tensions among the three main
negotiators-particularly between Del-
fim and Langoni, director of the central
bank-were eased by Langoni’s dis-
missal in September 1983. Langoni, a
Chicago-educated monetarist and former
professor, was fired after calling the
September IMF agreement “excessive
and associated with too high social
costs.” Langoni disagreed with two
points in the agreement, the balanced
budget and the commitment to reduce
inflation to 55% by 1984.
But according to popular wisdom,
the dismissal was primarily the result
of a personality clash, rather than an
REPORT ON THE AMERICAS 6ideological dispute. Ironically, the
monetarist has left, while Delfim, for-
mer professor of Keynesian economics
at the University of Sdo Paulo, remains
in office, defending the extreme ver-
sion of monetarism advocated by the
IMF. The incident served to consoli-
date power with Delfim Netto, making
him chief manager of Brazil’s economic
fate in the foreseeable future and there-
by-as he himself put it in an interview
last fall-the “most hated man in
Brazil.”
“Half the ministers want Delfim
sacked, the others want him killed,”
one top Delfim aide told an interview-
er, confirming Delfim’s self-assess-
ment. Yet harsh words do not seem to
weaken his determination to lead Brazil
through these years of severe economic
and social crisis. 1983–a year of
austerity-opened with a 30% devalu-
ation in addition to the monthly adjust-
ments of the cruzeiro’s exchange value,
making imports of wheat-an impor-
tant ingredient in the low-income diet–
more expensive. Subsidies on food,
electricity, water and gas were drasti-
cally curtailed in June.
In an effort to reduce government
spending, construction on Iguape I and
II nuclear reactors has been stopped
indefinitely. Planned investments in
the steel industry have been reduced by
47% and investments in hydroelectric
power scaled down.
The government hopes to attract
$1.5 billion in new foreign investments
and has introduced several measures to
that end. Some restrictions on remit-
tances of royalties and technical assis-
tance payments were lifted, making it
easier for foreigners to take profits
earned in Brazil out of the country.
Supplemental income taxes on profits
sent abroad were eliminated.
Such measures reveal the govern-
ment’s degree of desperation. All are
directly detrimental to the balance of
payments, allowing multinational cor-
porations to use up scarce foreign cur-
rency for their own purposes. The sole
justification of these steps is that the
loss will be overcompensated by new
foreign investments. It is a one-sided
offer; Brazil makes sacrifices to entice
new investors, while multinationals
need not commit themselves to anything.
And, in the middle of a world recession
Claudio Edinger/Kay Heese Former central banker, Carlos Langoni.
and a climate of social tension and po-
litical turmoil, who is going to invest in
Brazil?
On the Brink of Default
In the meantime Brazil is desperately
trying to make ends meet in order to
avoid the excessive arrears in debt
service payments which would trigger
a default. The economic trio-now
completed by central bank President
Affonso Celso Pastore-frantically
travels throughout the world, hoping to
drum up a few million dollars at each
stop in order to meet the payments at
the end of each quarter. Reluctant to
lend Brazil money for any length of
time, banks are forced to grant short-
term loans to cover interest on the out-
standing debt, with few prospects of
greater solvency when these new short-
term loans fall due.
Having agreed to service the existing
debt on time, Brazil has few alterna-
tives but to sink deeper into the mud of
obligations. Short of a comprehensive
rescheduling, banks, governments and
international financial institutions came
up with last minute bridge support
loans at the close of 1982:
* $600 million was granted by West-
ern bankers as an emergency measure
in November. The sum was to be re-
paid in 60-90 days.
* $1.23 billion was made available by
the U.S. Treasury Exchange Stabiliza-
tion Fund, a reserve used to provide
countries with short-term financial aid
to prevent instability in currency mar-
kets. The bridge loan, no gift to be
sure, is at competitive rates for less
than three months and intended as in-
termediary financing until the IMF
loan comes through. It thus increased
pressure to complete the IMF talks.
* $300 million was added by the
Treasury Fund a month later.
* $2.4 billion in short-term loans from
the private banks, as nervousness about
a possible default increased.
* $4.5 billion is to be provided by the
IMF, conditional upon a mutually agree-
able letter of intent and drastic austerity
measures. Disbursement of this loan
was held up until September 1983.
Meanwhile the Bank of International
Settlements (BIS) chipped in $1.2 bil-
lion in January 1983 for three months
to be repaid with IMF money.
Fights Among Private Banks
This piecemeal approach was pre-
cisely what Delfim Netto had hoped to
avoid. Brazilian officials were looking
for a deal permitting them to increase
borrowing from abroad by 8% in 1983
and 7% in 1984, reducing the debt over
a long period of time. A four-point
proposal had been worked out and sent
to the creditor banks. It included:
* $4.4 billion in new loans;
* rescheduling of $4.7 billion which
was the equivalent of debt service pay-
ments for 1983;
* a roll-over of short-term trade cred-
its totaling $9 billion;
* maintenance of short-term credit lines
for Brazilian banks at the levels pre-
vailing in mid-1982.
Getting the close to 800 creditor
banks to agree to this scheme proved to
be a difficult enterprise. While the
larger banks were, in principle, ready
to go along with this IMF-sanctioned
plan, many smaller banks, whose par-
ticipation is vital, chose to drag out the
discussions. Unwilling to throw good
money after bad, many would much
rather collect their money or even write
it off as a loss and forget Third World
lending altogether. Small banks also
complain about the hierarchical struc-
ture of banking, which allocates most,
of the fees and charges involved in the
renegotiations to the handful of ‘lead
banks,’ leaving them with little more
MARCH/APRIL 1984 7 7 MARCH/APRIL 1984than headaches about their ever-increas-
ing Third World portfolios.
1983 Agreement: 15% GDP Drop
A new letter of intent was finally
signed in September 1983, more than a
year after the secret negotiations were
started and broken off because Brazil
did not satisfy IMF demands.
Hoping to counteract mistrust, the
government published the IMF agree-
ment in several Brazilian newspapers.
Folha de Sdo Paulo also published
an analysis of the agreement by Luiz
Gonzaga de Mello Belluzzo, an eco-
nomics professor at the University of
Campinas. Belluzzo serves as economic
consultant to the Gazetta Mercantil
Forum, an elite business group which
has condemned the agreement.
He concluded that the measures–
reducing imports by 7% in real terms,
cutting the budgets of state enterprises
and raising further the prices of public
services-will all serve to increase in-
flation rather than reduce it. A 5% per
month inflation ceiling, to be further
reduced to 2.4% in 1984, can only be
implemented if real wages are cut dras-
tically. The cuts in wages and reduc-
tion of investments in the state sector,
according to Belluzzo, will worsen the
current recession. The IMF will super-
vise Brazil’s progress on a monthly
basis rather than the usual quarterly
checkups.
Calculations by Edmar Bacha, a
well-known Brazilian economist who
will be a guest professor at Columbia
University this spring, revealed that
compliance with the IMF request to
balance the budget would lead to a re-
duction of the gross domestic product
by 15%. With the fastest growing pop-
ulation in the world, such measures are
clearly not viable for Brazil. The GDP
must increase by at least 6% annually
just to create enough jobs to keep the
rate of unemployment at its current
level. As Bacha put it, “Even if the
government wanted to, the country re-
fuses to commit suicide.'”
Rio Looks Like Baghdad
Already there are so many vendors
in the streets, Rio is beginning to look
like Baghdad, observed Fernando Gas-
parian, international secretary of the
opposition PMDB. The official rate of
unemployment is 20%, but everyone
knows that this figure is not much more
than cosmetics. Government recession-
ary policies have been condemned by
Brazil’s unionized workers in marches,
strikes and walk-outs.
In the summer of 1983, 50,000 gov-
ernment workers organized a protest
march in Rio. 750 Petrobras workers,
in Paulina, walked off their jobs last
July for the first time in 20 years in
protest of the government austerity
plan. Also, a growing number of the
non-unionized “poorest of the poor”
are getting together to demonstrate their
growing anger and desperation. Three
days of extremely violent rioting shook
Sdo Paulo last April. A gathering of the
unemployed turned into a march on the
government palace, and sparked days
of rioting when the newly elected op-
position governor, Franco Montoro,
refused to receive spokespeople.
Supermarkets were looted in Rio
and Sio Paulo, reflecting the growing
problem of starvation and malnutrition
in urban Brazil. In August more than
2,000 hungry drought victims raided
food warehouses, carrying off 59 tons
of provisions in the northeastern town
of Senador Pompeu, one of several
cities where similar acts of spontane-
ous “self-help” took place.
The social misery is growing, plac-
ing Brazil among the world’s most ex-
plosive countries. “Poverty alone does
not explain the explosive nature of the
crisis,” suggests Ant6nio Rangel, a
political scientist who edits an opposi-
tion magazine, “because poverty has
always been serious here. The problem
is ‘pauperization,’ the phenomenon of
people slipping down the economic
ladder. ”
Repression Won’t Pay Debt
Two scenarios are likely, though un-
fortunately not mutually exclusive. The
government might try to control social
unrest by violent means. Already, a
position paper distributed by the Rio
branch of the government party warned
that the actions of “hungry masses”
might lead to a “restoration of authori-
tarianism.”
Repression, however, will not pay
Brazil’s debt. In other Third World
countries, the rule of an iron fist is
often viewed favorably by the IMF if it
8
REPORT
ON THE AMERICAS
helps implement the austerity program,
and is not infrequently rewarded in
hard currency. But Brazil’s foreign ex-
change needs far surpass the IMF’s
means. Authoritarian repression, while
it may keep the government in power,
will not solve Brazil’s fiscal and social
problems. With presidential elections
scheduled for January 1985, the
generals may well be biding time,
hoping to put off the thorough
rescheduling that is bound to come
until mid-1985 or 1986.
Avoiding default will require com-
promises by the banks in the long run,
but the latest round of rescheduling
completed in October 1983 shows that
only a small advance has been made in
that direction. The banks remain ada-
mant that no loans will be forgiven.
Brazil’s advisory committee, which
includes only the major lending institu-
tions, managed to put together a $6.5
billion new loan, repayable over nine
years with a five-year grace period dur-
ing which only interest payments would
be made. This new money will allow
Brazil to pay off arrears totaling about
$1.7 billion. The four-part package-
said to be the largest syndicated loan to
a government-also includes the re-
scheduling of about $5 billion of loans
due this year, the maintenance of $10.3
billion of short-term trade financing
and $6 billion of interbank credit lines.
After considerable last minute scurry-
ing to secure the necessary commit-
ments, the agreement was finally signed
on January 27 in New York City.
Delfim Netto’s strategy is a risky
one. By doing the bidding of Brazil’s
creditors, he has made himself a chief
target of the domestic opposition. But
neither has he won the friendship of the
bankers, who simply see every new
austerity measure as an indication that
the bottom has not yet been reached.
If this new money is to cover 1984
foreign exchange needs, Brazil must
meet stringent goals, including a $9
billion trade surplus. Perhaps as an
omen of difficulties to come, the U.S.
government announced the same day
the agreement was signed that it intends
to impose high penalty duties on Brazil-
ian steel shipped to the United States,
a measure sure to mean a loss of U.S.
customers and a resulting drop in foreign
exchange earnings.
Menu
